Rhys Kesselman is the Canada Research Chair professor in public finance with the School of Public Policy, Simon Fraser University
Controversy over Prime Minister Stephen Harper’s proposed hike in the Old Age Security eligibility age has been far too narrow in the policy options considered. OAS reform is just one piece of the much more complex puzzle of improving the retirement income system.
By now the critics have demolished the fiscal sustainability rationale for an OAS age change, and they have properly noted the adverse effects on lower earners unable to work to age 67 and the likely shifting of federal savings to higher provincial welfare costs.
While the necessity of fiscal savings has been overstated, the pressures from unprecedented demographic change on all aspects of Canadian public policy are undeniable. With a rapidly aging population, public pension costs including OAS/GIS will mount, public costs of health care and long-term care will soar, all at the same time that the proportion of working-age taxpayers will be shrinking.
A key issue is intergenerational equity with younger cohorts who will have to bear the burden of baby-boom retirees. Reforms of the nation’s retirement income system should also consider equity in two other important dimensions: between lower and higher income retirees and between higher and lower savers among workers of each cohort.
Any shift of the OAS eligibility age should be implemented over a long period and with much advance notice. Even so, workers with lower lifetime earnings, who tend to retire earlier in part from the strains of physically demanding jobs, could not be expected to save enough to bridge the loss of two years of OAS benefits from age 65 to 67.
One remedy to this problem and the associated risk to provincial welfare costs would be to maintain the benefit levels for “early” retirees with little income. For those aged 65 and 66, OAS benefits would be gradually phased out, but this would be accompanied by a special Guaranteed Income Supplement benefit rising by the amount of OAS reductions. Retirees aged 65 or 66 with much income would eventually lose their OAS benefits, while the special GIS would fully insulate the lowest income retirees.
Another approach to reducing future OAS financial burdens would be to stiffen the tax recovery applied to beneficiaries with incomes above $70,000. This provision, which now affects few seniors, could have its threshold either frozen or reduced to a figure such as $50,000 over an extended period. Since the tax recovery affects seniors with substantial incomes, concerns over adverse effects on vulnerable seniors should not arise.
Yet another component of the retirement income system puzzle arises from the federal commitment that Tax Free Savings Account funds will never affect income-tested GIS benefits and the OAS tax recovery. One study has estimated that TFSAs could potentially raise the cost of the GIS part of the OAS program by up to 84 per cent.
Over a lifetime an individual could accumulate half a million dollars or more in a TFSA – and twice that amount for a couple. Thus full immunity of TFSAs would be unfair when well-off seniors sought to draw benefits intended for needy retirees. Now is the time to establish a clear limit on the immunity of TFSA funds from GIS and OAS clawbacks.
A key deficiency of the nation’s retirement income system is the inadequate resources acquired by many individuals over a wide range of earnings through workplace pensions, tax-sheltered savings, and public pension programs. Federal and provincial governments recently examined this issue and opted to proceed with new Pooled Registered Pension Plans while placing on the back burner proposals to expand the Canada Pension Plan.
The PRPPs may be of modest benefit to some employees in smaller firms, but they will be limited by their voluntary nature for both employers and employees, the lack of any requirement for employer contributions, and the absence of any guarantees on benefit levels.
Expansion of the Canada Pension Plan is long overdue. Raising the CPP benefit rate from its current 25 per cent of insured earnings and lifting the insurable level of earnings from $50,100 would strengthen the entire retirement income system. It would do so without intergenerational inequities, and it would relieve higher savers from supporting low savers in their retirement even when both have the same lifetime earnings.
A far wider range of policies than just the OAS eligibility age need to be examined for their efficacy in supporting retirees, their budgetary cost, and their fairness. Like a Rubik’s cube, the retirement income system puzzle may be challenging, but with serious thought and open dialogue it can be solved.
Author’s note: A more expansive version of this post is available .