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OAS Debate & Straw Dogs

A national debate has been initiated on raising the of eligibility for Old Age Security – mostly likely to 67.

The underlying mathematics are well documented.  For more than a decade, demographic experts, economists and the government’s own actuary have told Parliamentarians that entitlement programs and healthcare will be threatened by locked-in demographic trends.  In more recent years, Kevin Page and the Parliamentary Budget Office have criticized the Government for ignoring these realities. Former Bank of Canada Governor David Dodge has suggested government should have taken this action sooner and is encouraging the Government to get on with it. With the security of a majority, it seems the Harper Government is now listening and prepared to act.

The demographics are relatively simple. Due to the boomer cohort, more elderly people will push up the cost of entitlement programs such as Old Age Security and Guaranteed Income Supplement Program (GIS). The number of recipients of OAS is expected to almost double over the next 20 years —from 4.7 million in 2010 to 9.3 million by 2030.  OAS and GIS outflows are expected to increase from $36 billion this year to $110 billion in 2030.  Meanwhile, there will be relatively fewer working age people to generate economic growth and pay the taxes to cover those rising costs.

What is the consequence of waiting two years longer to collect their Old Age Security? Based on today’s rates, an affected individual would collect $12,200 less from the Federal Government. The choice would be to save more or work longer –which is really what the Government and economists would like all of us to do to address the expected labour squeeze.

The Opposition Parties believe the Government has given them a club to beat them with and they want to make the most of it.

It is worth noting that the Opposition Parties are not attacking the underlying math, (i.e., more old people, fewer working people) but they are making the case that Government should not raise the eligibility from 65 to 67 and offering a couple of justifications. Let’s take them one by one.

The Magic Savings Argument:  Politicians use this argument at the slightest opportunity. It goes like this – Government could afford to do this (the good things that we and our supporters think they should do) if they stopped doing that (the bad things that we and our supporters think they should not do). Both the Liberals and NDP have already suggested that if the Conservatives did not plan to spend so much on prisons and the F-35 air crafts, then the OAS issue would go away.

The weakness of this argument and what makes it magic (i.e. a sleight of hand trick) is that those using it almost never compare apples with apples.

In the 2010-2011 fiscal year, the Federal Government spent $35.6 billion on Elderly benefits (the OAS and GIS making up most of it.)

Corrections Canada spent $2.4 billion in total, most going to operating expenses and only a smaller share to capital expenditures (building new prisons.)

DND did spend more - $21.3 billion in total last year but only $2.5 billion actually went towards their capital budget for new equipment.

You may have your own opinion on whether the Government should be building additional prisons or buying new fighter jets but there is insufficient savings in those programs to fill the gap caused by rising pension costs.

Politicians of all parties invariably use the Magic Savings argument when they have no solution to a problem but wish to pretend they do.

The Conservatives are exaggerating the problem.

This argument states that the cost of the OAS will go up but so will our capacity to pay for it and the actual shift of resources is not huge. The most reported statistic in support of this argument is that as a percentage of GDP, the cost will grow from the current 2.41% of GDP to 3.14 % by 2031.

It does not sound like a large adjustment but this is deceptive.

First, while we can predict what our Old Age costs will be in 2030, we cannot accurately predict what GNP or government revenue will be. Most predictions are based on economic models that suggest a steady rise in GNP which may or may not turn out to be true.

Second, whenever you measure any public expenditure against the GDP, the number always appears small.  But, compare it against the actual size of the federal budget, it appears much larger. The federal government equaled approximately 16.6% of GDP last year. So a doubling of recipients in a fully indexed income support scheme represents a huge cost challenge.  It can’t be done without either huge cuts in other programs or a large tax increase.

It is disingenuous to suggest you can double of the recipient base while the payer base declines and this only requires a slight adjustment in public finances.

It will hurt poor people

This is the line of attack that Liberal Leader Bob Rae has been advancing and there are facts to support it.

First, GIS payouts tied to low income are triggered by the OAS. Those living on provincial disability or welfare payments would lose because the provincial payments are typically several hundred dollars a month less then what is provided by a combined OAS and GIS. For those on disability pensions or welfare, 65 is when their life gets a little better. Provincial welfare budgets would also be adversely affected.

Elderly women would also be hurt since they are more dependent on OAS and GIS pension income.  In general the working poor would lose both because they would receive less on the front-end and their life expectancy trails their more affluent fellow citizens so there is less chance to make it up on the back-end. Those workers who still do hard physical labour would have to wait another couple of years which represents a real hardship for many of them.

However, the Old Age Security does not only go to poor people.  An individual can generate up to $67,668 in earnings before the OAS benefits start to be clawed back and then still receive a partial OAS pension up to $109,764 in earnings. A retired couple splitting their income could earn over $130k a year and still receive full OAS pensions.

The fact that some recipients will be hurt by raising the age of eligibility is not, by itself, an argument against it.  But, a strong case can be made that there should be additional compensatory measures to address the situation of the neediest among us.  Options could include starting the claw back at lower income levels to provide more funding or devoting more funding to the GIS portion while continuing to allow it to be accessed at 65. There also may be a case for increasing the mandatory contribution rates to the Canada Pension Plan so recipients are better prepared if and when they need the income.

If the goal was to keep costs manageable and still have pensions commence at 65, then the OAS could be means-tested but no political party has come out in favour of this, nor are they likely to because of the political blow-back.

Inter-generational Equity?

When Canada’s Old Age Security Pension was established, you had to be 70 years of age to collect.  That was changed to 65 in the sixties and seniors did very well. The collected sooner and as life expectancies went up, they collected longer. If the age is raised from 65 to 67, the affected seniors will not do as well unless average life expectancies continue to increase.

However, if the eligibility rate stays at 65, most of the cost will be borne by a smaller number of the pensioners’ working-age children in the form of higher taxes and/or lower services.  Additionally, they also will be expected to pay for higher health care costs - the real 900 lb gorilla in this demographic debate and a far more serious problem that the OAS. Our children will also be expected to cover these costs in a far tougher, volatile economic environment. Depending on the competitive nature of international environment, higher taxes may not be a viable option.  It is this dynamic which makes the experts believe the present program is not sustainable over the longer term.  Delaying the decision now only ensure that benefits will be cut far more abruptly and aggressively later.

It is the nature of government programs to look backwards. So we fund old institutions, old industries, old problems and yes, old people. But, unless we invest in the young and the future and in such things skills and training and education and infrastructure, we are diminishing our capacity to pay for these old obligations in the future.  We pretend to balance the needs of the young and the old but our priorities are skewed towards the past. This trend is exacerbated by the fact that the old consistently vote and the young vote less and this trend grows.

By taking action now the Conservatives are averting a serious problem down the road but they are taking some political risk to do so – especially since their voting demographic skews older. If they succeed and the financial viability of the pension systems is a non-issue 15 or 20 years from now, this trade-off will be largely forgotten. This is why politicians so rarely take these steps and the Opposition will not be applauding.

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