Kevin Milligan is Associate Professor of Economics at the University of British Columbia
The spirited debate over possible changes to the Old Age Security pension has raised the issue of generational fairness. Pensions involve ways of transferring income generated by people working today to those who are retired. In this way, generational concerns are properly at the core of the issue.
Looking at the Canada Pension Plan, generational comparisons are relatively easy -- the recent OSFI Actuarial Report provides a handy reference table on p. 74. The report shows internal rates of return, which compare the contributions paid by Canadians to the benefits received over a lifetime. For someone born in 1940, the internal rate of return was 6.3 per cent, adjusting for inflation. In contrast, for those born in 1970 the return falls to 2.4 per cent. A secure, inflation-adjusted 2.4 per cent is not a bad rate of return, but younger Canadians are not getting as good a deal as their parents did.
Analyzing the Old Age Security pension for generational fairness is harder, as the benefits have been paid out of general revenue since 1972. One way forward is to examine the number of years a Canadian might expect to receive the Old Age Security pension.
In the accompanying graph, I plot the life expectancy for a male and a female who has reached age 65. The graph shows the years from 1921 to 2007, using data from mortality.org.
The last 30 years have delivered a great bounty for the lifespans of males. Life expectancy grew by nearly four years. To put that in perspective, lifespans for males grew on average at the remarkable pace of about 1.5 months every year between 1977 and 2007. The gain for females over the last 30 years is more modest -- but women attained an expected increase of about three years. The Office of the Chief Actuary expects mortality improvements to slow in the future, but not reverse.
Longer lifespans mean we get more time with family; more picnics, sunshine, and flowers. We also will receive a longer stream of OAS pension payments. When pondering generational fairness, we ought to consider the impact of extended lifespans for future generations.
Left unchanged, a promise to pay OAS pensions to Canadians starting at age 65 leads to ever-larger lifetime total flows of OAS income. If generational fairness demands an equal lifetime total flow of benefits to each generation, then it makes sense to reconsider whether the line we draw between the work and retired parts of life ought to remain forever pinned to age 65.
Kevin Milligan's recent posts can be viewed here.