Alexandre Laurin is director of research at the C.D. Howe Institute.
Earlier this week, The Globe and Mail revealed internal research by government officials showing a global trend toward older normal pension ages, with most OECD countries' target policy retirement age to be raised to at least 67 by around 2050. An eventual increase in the normal retirement age, here in Canada, appears inevitable.
Despite this trend, Ottawa recently reversed course and cancelled a scheduled gradual increase in the Old Age Security (OAS) eligibility age from 65 to 67, to be fully implemented by 2030. The recent decision fails to recognize longer life expectancy since the 65-year-old benchmark was adopted, and the current marked trend towards later retirements. Projections show that by 2030, about 40 per cent of 65-to-69-year-old Canadians may be working while at the same time collecting an OAS pension. This was certainly not envisaged in the late 1960s when the eligibility age was lowered from 70 to 65 years old.
Above all, the eligibility age for OAS pension plays a symbolic role. It sends an important signal. It contributes to entrenching a social culture of what is considered an adequate retirement length under normal circumstances – which is naturally subjective – or for how long a retirement young people should now start planning. Many health and other benefits for seniors also kick in at 65, and in a federal country, leadership by the national government in raising this age can do a lot of good at the provincial and even local levels.
In the late 1960s, those turning 65 could expect to live for another 15 years on average. In 2016, they can expect to live for 20 more years, with Canada's Chief Actuary projecting this number to rise to 24 years by 2050.
Longer retirements carry a substantial cost. Younger workers planning on retiring at 67 instead of 65 would need to save less for their retirement – at a time when low interest rates forces higher savings –freeing up some funds now, when they are really needed to buy a house and raise a family.
Undoubtedly, the current trend towards later retirement can also be partly explained by young educated people entering the work force later in life than previous generations. Young people staying active in the work force later in life will dampen the negative economic impacts of population aging on the labour market. A stronger economy translates into greater standards of living, and increased tax revenues to pay for public programs such as health care.
The main fiscal problem with OAS is that its cost is projected to grow faster than the economy – and therefore faster than tax revenues – as a consequence of the baby boom. This will make balancing the books in the future that much more difficult. If tax rates do not increase, then the growth of other federal expenditures will need to be kept in check – including social, health and infrastructure transfers to provincial governments.
Ottawa's Chief Actuary calculated that raising retirement age eligibility to 67 would have saved $11-billion a year. By 2050, the cost savings would have been $16-billion a year. In relation to projected economic growth, these cost increases appear small, and could easily be absorbed by gradually restraining the growth of federal employee compensation, or by a small increase in the GST rate or in personal income tax rates. But these sacrifices will become politically difficult to justify when an increasingly large chunk of the 65- to 67-year-old population is both working and collecting an OAS pension.
The decision to raise the normal retirement age from 65 to 67 was made to protect a minority of low-income seniors – who would not have the ability to defer retirement – from having to rely on welfare programs while waiting the additional two years before being eligible for the more generous OAS/GIS system. Protecting the most vulnerable from poverty is indeed a laudable goal, but could be have been achieved through a more targeted and less costly program.
Ironically, the recently agreed CPP expansion will burden those same low-income individuals the retirement age policy reversal was meant to shelter. Workers earning low incomes will be contributing to the expanded CPP program – an important current cost in families in which every dollar counts – for future CPP rewards that will reduce by up to 75 per cent the GIS (guaranteed income supplement) payments they may have been entitled to receive. Both reforms – raising the OAS eligibility age or forcing low-income participation into expanded CPP – would reduce the future cost of the OAS/GIS program.
The Liberals' OAS retirement age reversal is a bad move, running counter to international evidence, and the needs of a Canadian population living longer, entering the work force at a later age, and retiring older. Their likely punishment is that they may have to reverse their reversal – and if current trends continue, that would set the stage for delay to an even higher eligibility age.