We won’t know until the March budget exactly what changes Finance Minister Jim Flaherty has in store for Old Age Security, but we have a pretty good idea of his options, thanks to Thomas Klassen.
The York University political scientist is a leading Canadian authority on pension reform. We asked him Monday how he would change the OAS if it were up to him. His first piece of advice: “Don’t do it.”
“The OAS isn’t really a lot of money,” he observed. “The OAS isn’t going to cause the federal budget to crash.”
Proper pension reform, he strongly believes, would involve eliminating the incentives within the Canada Pension Plan for early retirement – you can start to draw on it as early as age 60 – and creating new incentives to encourage people to work longer and retire later in exchange for larger pensions.
But “changing the CPP is messy,” he acknowledged, because those changes require the consent of the provincial governments. That is why Prime Minister Stephen Harper is targeting the OAS, a federal-only program, while leaving CPP alone.
So let’s say, as is heavily rumoured, the Conservatives want to raise the age for qualifying for OAS payments from 65 to 67 years. What’s the best way to do that? Prof. Klassen’s advice: “Do it very slowly. Don’t start for 20 years, and then increase the eligibility gradually over the next two decades.”
The key to changing a pension system is to give workers plenty of certainty. Prof. Klassen believes that anyone 45 or older should be able to expect that the rules under which they made their retirement plans will still be in place when they retire. Any changes should only affect those who still have 20 years or more to prepare. Other governments, such as Germany and the United States, have offered similar lead-times when reforming pensions.
But as the Harper government likes to point out, 20 years from now the OAS will be costing the federal government three times what it costs today. So what should Ottawa do if it wants to start bending the curve before then?
The only other option, Prof. Klassen reluctantly advises, is to claw the benefit back through the tax system. Right now, anyone making a retirement income of around $67,000 or less gets the full OAS benefit. Above that, the benefit is taxed back progressively. By around $109,000 a year in retirement income, the benefit disappears entirely.
If the feds want to save money, they could start the clawback at a lower level of income, and eliminate it completely at a lower level as well. But then the OAS would really just become another version of the income-tested Guaranteed Income Supplement, which offers help to low-income seniors.
This is a bad way to do things, Prof. Klassen believes, because “it’s harder to get people to pay taxes. They figure ‘well, I’ll never get this money back when I’m older.’” Better to build in incentives for working longer, he maintains, than impose punishments for saving too much money.
Mr. Harper might be thinking the same thing, which would explain his repeated assurances in the Commons Monday that, while the government must make changes to social programs to reflect “demographic realities,” the Conservatives “are not cutting transfers to either provinces or individuals.” That can only mean that anyone reasonably expecting to collect the OAS under the existing rules will in fact collect it.
Which prompts the obvious question: How many years, or decades, do the Conservatives plan to wait before requiring people to work longer in order to receive their full pension?
That is a very pointed question, as we wait for Mr. Flaherty to reveal what exactly he has in store.