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OAS reforms too timid and too narrow to be effective

Appeared in Business in Vancouver
Authors:
Release Date: May 2, 2012

While the federal government should be commended for showing leadership in tackling a sensitive issue, increasing the age of eligibility to 67 from 65 for Old Age Security (OAS) was too timid and too narrow a reform.

Increasing the eligibility age for retirement programs like OAS (and related programs such as the Guaranteed Income Supplement (GIS) is a logical reform for several reasons.

For starters, demographic circumstances have changed considerably in Canada. Average life expectancy for males and females combined in the mid-1960s was 72 years, which means an average period of benefits of seven years. Average combined life expectancy now stands at 81, implying a benefit period of 16 years or more than double the original benefit period. If the age of eligibility for OAS were indexed for increases in life expectancy, the age of eligibility would be 74 years today.

Upping the age of eligibility to 67 from 65 was much too timid because it does not come close to adjusting for changes in life expectancy that have occurred since the mid-1960s.

It is also important to note that the physical demands of many jobs in Canada have changed markedly over the past 50 years. Interestingly, research comparing older people who remain active in the labour market, including part-time and volunteer work, compared with those who cease working consistently shows the former are healthier and more satisfied and live longer.

Additionally, the change won’t be implemented until 11 years from now in 2023 and won’t be fully in force until 2029. Delaying the reform’s complete implementation for 17 years will significantly reduce its ability to materially reduce the fiscal pressure retiring baby boomers (those born between 1946 and 1965 and retiring between 2011 and 2030) are placing on government programs.

At approximately $38 billion, and 16.1% of program spending, Old Age Security is the federal government’s single largest program expense and is paid out of general revenue. (There is no dedicated revenue source or pre-funding mechanism for OAS.)

Even with the increased age of eligibility, OAS will consume ever-greater proportions of the federal budget. For instance, we estimate that by 2030, OAS will represent 21.9% of federal program spending.

While increasing the portion of the federal budget dedicated to OAS does not mean the program is unsustainable, it will require additional future changes to benefits, reductions in spending in other areas of government or additional taxation.

In tackling the sensitive issue of retirement program reform, the government unfortunately missed an opportunity to enact bolder and broader reform of Canada’s pension system.

Beyond a greater increase in the age of eligibility for OAS, the federal government could have proposed a more targeted benefit focused more specifically on lower-income Canadians.

Currently, OAS benefits are reduced (or “clawed” back) for individual incomes above $69,562 and are completely eliminated when an individual’s net income is above $112,772. The claw-back calculation is based on individual rather than household income, meaning that a couple can earn nearly $140,000 and still receive full OAS benefits.

In addition, broader pension system reforms would have tackled barriers for older workers to remain in the workforce and provided options for greater private savings.

Ultimately, increasing the age of eligibility is sensible policy but broader reforms are needed.



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