Thinking about tomorrow, and the day after tomorrow, is always very hard for political leaders.
Nowhere is this more evident than if tomorrow, metaphorically speaking, is well down the road. However, when it comes to pensions and other aspects of an aging population, such as drugs for seniors, tomorrow is now.
The baby boomers have begun to retire. For the next quarter century, aging will be among the country’s greatest public-policy challenges.
One of these challenges is something we have historically thought little about: intergenerational fairness. More people will be out of the work force and fewer people will be working – if we don’t change course, the costs of aging will be thrown onto the next generation through higher taxes, fewer services or both.
Canada has to think much more about prepaying for services the elderly will need – such as pensions and drugs – rather than doing nothing now and paying the higher costs from future tax revenues.
Pensions are the classic case of intergenerational fairness. Although this almost never gets any attention, the Old Age Supplement and the Guaranteed Income Supplement for low-income seniors are among the fastest-rising parts in the federal budget. Their combined cost is expected to be around $110-billion by 2030.
These programs are paid from general tax revenues. The higher these costs go – and an aging population will drive them up – the greater the burden will be on the next generation, who will be paying the largest bulk of the taxes.
Meanwhile, the Canada Pension Plan, by almost universal acknowledgment, does not provide enough income for enough people – especially those who have no company pension plan. These gaps reduce spending power, lower economic activity and, in some cases, drive up costs for other government support programs.
Registered Retirement Savings Plans are used by only a minority of the population. The Conservative government’s Pooled Registered Pension Plans are a weak addition to the mix. They are voluntary and cover only a small number of workers.
Almost every study has shown that voluntary contribution plans don’t work nearly as well as compulsory ones, such as the CPP. As Jim Leech and Jacquie McNish write in their recent book about pensions, The Third Rail, “voluntary savings schemes are not effective.”
They warn that if nothing changes, “it is possible, indeed probable, that all taxpayers will find themselves burdened with the expense of rescuing and providing for a generation of marooned, financially unprotected retirees.” For “all taxpayers” read the next generation.
For intergenerational burden shifting to be avoided, people who will benefit in future have to start paying more now, which is what proponents of increasing CPP contributions and benefits are correctly arguing. The Conservatives don’t get the argument, witness to which was their vote this week against a New Democratic motion to increase CPP contributions and payouts.
The same can be said for seniors’ drugs, an almost universal need. Any provincial government knows that its seniors drug bill is already rising and will shoot up in the years to come.
They can tinker at the margins, raising deductibles for more affluent seniors. Or they can work out a social insurance model, preferably on a national basis, into which people and governments and companies pay so that money will build up to defray future costs. Otherwise, the next generation will pay through higher taxes or reduced services.
Small business groups (most of which don’t offer pensions) are against any contribution increases, claiming that thousands and thousands of jobs will be lost because companies will be less competitive. Just as naturally, a Conservative government heeds this message.
The economy is too weak, says the business lobby and its Conservative listeners. You can bet that even if the economy were stronger, the lobby would say the same thing. There are always many reasons – economic and political – why doing nothing today is preferable to looking down the road. There are risks now, but there are equally great, if not greater, risks tomorrow.
The CPP should be strengthened, as Ontario, Prince Edward Island and important trade unions are arguing.
Jean Chrétien’s Liberals strengthened the CPP in the mid-1990s. It needs upgrading again. But this government does not take that kind of long view.