The Liberal government's decision to restore Canada's Old Age Security eligibility to age 65 may be shrewd politics. It may even be fiscally manageable. But it's lousy economic policy.
Perhaps I should elaborate. It's lousy, short-sighted, dim-witted economic policy. It ignores everything we know about the aging demographics in this country, and the things policy makers should be doing to address the economic fallout from them. It's a remarkable step in the wrong direction.
The Parliamentary Budget Office, the federal fiscal watchdog, weighed in this week on the Liberals' intention – pledged during last fall's election campaign and promised in last month's budget – to cancel the previous Conservative government's plan to raise the eligibility age for OAS to 67, beginning in 2023. The PBO estimated that the lower eligibility age will cost Ottawa an extra $11.2-billion in 2029-2030 – the first year that the phased-in age change was to be fully in effect – over what it would have spent with the age-67 eligibility.
The good news is, the government can probably afford it. The PBO declared that the OAS program would remain quite sustainable with eligibility at 65, and the additional costs wouldn't impede future governments from continuing to whittle down Canada's federal debt-to-GDP ratio, although a bit more slowly. (The additional cost amounts to a thin 0.35 per cent of GDP.)
But the price tag largely misses the point. In reverting to the age-65 eligibility, the new government, which bills itself as coming into office with fresh ideas to address Canada's economic future, is instead sticking its head in the sand with regard to an OAS program that is decades out of step with Canada's demographic realities.
In the mid-1960s, when Ottawa created the system of old-age benefits that essentially is still in place today, the eligibility age for OAS was 70 – at a time when the average life expectancy for a 40-year-old male was just 73. Not long after, the government lowered it to 65, but even then, it could be viewed as a relatively short-term bridge between retirement and death.
In the nearly half-century since, the eligibility age hasn't budged – but the length of our lives has stretched out beyond anything policy makers could have imagined in the 1960s. When the average Canadian of today hits that 65-year eligibility age, that person is expected to live for another 20 years. OAS isn't just helping us be more comfortable in our fading twilight any more; it's paying out for nearly a quarter of our (average) lives.
Where the typical 65-year-old Canadian in the 1960s was, frankly, old, the typical 65-year-old Canadian of 2016 is, relatively speaking, healthy and vibrant. He or she is in many cases more than still capable of working, and is years away from needing government support to maintain a livable income.
And given the harsh economic ramifications of the country's aging population, the Canada of the next couple of decades is going to need all the able-bodied workers it can find. As more and more boomers head into retirement age, growth in the country's labour force looks destined to slow to a crawl. And since growth in productive labour is critical to expanding economic output, that means the economy is in danger of slowing to a crawl, too. This is the biggest challenge to the Canadian economy over the next decade – how to keep it growing with a greying and increasingly non-productive population.
One obvious solution is to craft government policy around encouraging more of the country's older workers to remain in the work force longer. That would improve labour growth, lift the economy's growth potential, and generally raise the prosperity levels for the entire country.
A higher age for qualifying for elderly benefits is a very practical way to do that; it would make retiring at 65 financially less palatable. Instead, this government has committed to spend an extra $11-billion a year to provide a disincentive for older workers to keep working.
It's not that this government doesn't grasp the demographic challenge. Indeed, it's the impetus behind the Liberals' massive infrastructure spending plans (only in that case, the idea is to put in place the physical tools so that each worker is capable of producing more).
So why is it tilting its policy away from this when it comes to the OAS eligibility? It's hard to see any logic beyond scoring political points with the huge lump of baby-boomer voters who stood to be hurt by the Conservatives' age change. When you consider that one-third of voting-age Canadians are between 50 and 70 years old (that's roughly the boomer generation), there's a pretty compelling political argument for keeping them happy.
But as economic policy, it's pretty much the opposite of what a government facing a demographic roadblock to future prosperity should be doing. It doesn't much matter whether the government can afford it. It's money poorly spent.