Kevin Milligan is Associate Professor of Economics at the University of British Columbia
In his address to the Davos Economic Forum, Prime Minister Harper raised the issue of major reforms to Canada’s public retirement income system. If a pension debate is upon us, then let’s start with a look at some facts about the federal system of public pensions.
Currently, the core Old Age Security pension is available starting at age 65. The Guaranteed Income Supplement, paid to about a third of seniors, begins at age 65. The Allowance is paid from ages 60 to 64. The Canada and Quebec Pension Plans allow reduced pensions to begin at age 60, with ‘full’ pensions at age 65. The Prime Minister explicitly (and correctly) pointed out that the Canada Pension Plan is not in financial difficulty. Instead, the target of reform appears to be Old Age Security.
If Canada does consider a change to retirement ages, we would not be alone. Among the G8 countries, the United States, the United Kingdom, Italy, Germany, and France have already made upward changes to their retirement ages. In Japan and Russia, it is being discussed.
Is Canada really different? No and yes.
Canada is not different because, in common with most other countries, Canadians are living longer. For men, a 65 year old in 2007 could expect to live another 18 years to age 83 -- a full 5 years longer than was the case in 1967. Women’s life expectancy at age 65 has also increased by 5 years. This improved longevity means that existing pension promises become ever-more expensive.
On the other hand, Canada is different because, unlike most other countries, our public pension commitments are not a substantial threat to our public finances. The Canada Pension Plan is in long-run balance. Old Age Security currently takes only 2.41 per cent of GDP. Very few OECD countries have lower levels of public pension spending as a share of GDP than Canada. To take the extreme example, Italy spends more than 14 per cent of GDP on public pensions -- up from 10 per cent only a few years ago.
How will spending in Canada grow as the baby boomers age? By 2031 -- at the peak of the baby-boom retirement wave -- the share of GDP spent on Old Age Security will rise to 3.14 per cent, for an increase of 0.73 percentage points over today’s level. Now, an increase of 0.73 per cent of GDP cannot be ignored, but neither is it disastrous. To provide some scale, David Dodge and Richard Dion project that spending on health will grow from 12 per cent to 18.7 per cent of GDP by 2031, for an increase of 6.7 percentage points. In the fight for government spending dollars in 2031, health is the elephant and the Old Age Security pension is the mouse.
Whatever the fiscal savings of pushing up the Old Age Security retirement age, we also must consider the cost. The wellbeing of Canadian seniors has improved tremendously over the last 40 years -- higher incomes, better consumption, and healthier lives. However, in the years approaching retirement ages, an increasing number of Canadians are unable to work due to disability, declining job skills, or other reasons. In research in progress, I am finding that around three quarters of those not working in the years just before reaching age 65 have other sources of income sufficient to get them out of low-income range. Of course, the flipside is that one quarter of them do not. If the retirement age increases, these Canadians may suffer as they wait for their public pension cheques to begin flowing.
Kevin Milligan's recent posts can be viewed here.