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February 8th 2012 | Source: Robert L. Brown is an expert adviser with EvidenceNetwork.ca 

OAS reform needs to be based on facts rather than alarmist fantasy...

The debate around raising the age of eligibility for Old Age Security (OAS) has only just begun and already we are up to our necks in misleading information. Unfortunately, some commentators have decided to use statistics the way a drunk uses a lamppost — more for support than illumination.

Recent examples from well-known and highly respected commentators (who should know better) have made some alarming claims. For example, that the percentage of the population collecting a pension will double over the next 20 years; or that the ratio of workers to retirees is headed to a 2 to 1 ratio; or that the OAS will triple in cost from $36 billion to $108 billion by 2030; and that there’s an $800 billion underfunded liability in our Canada Pension Plan (CPP), along with the Quebec Pension Plan (QPP)

While all of these statistics are accurate, they are so horribly out of context as to be useless or even harmful in pushing knowledge forward. No wonder the public is alarmed. But let’s look at the facts.

The $800 billion unfunded liability in the C/QPP is based on evaluating these programs in the same manner as a private sector pension plan. There is a $800 billion promise that is not pre-funded because, unlike General Motors or Air Canada, we do not expect the Canadian government to go into bankruptcy at any time. Thus, it is far more accurate to evaluate the C/QPP on the assumptions that there will be future contributors and future contributions. When that is done, there is effectively no unfunded liability in these systems.

This has been supported with every actuarial report of the CPP since its revision in 1996. These reports show clearly that the CPP is sustainable for the next 75 years at the current 9.9 per cent contribution rate. Similarly, the QPP is sustainable for 75 years at a contribution rate of 10.8 per cent.

It is also true that the dollar, nominal, cost of OAS will rise from $36 billion today to $108 billion in 2030. But in that period of time, we expect the economy to grow. The question is not how many dollars OAS will cost, it is whether or not that cost is sustainable.

There are many features of the OAS program, including the Guaranteed Income Supplement (GIS), that limit the real rise in costs. OAS benefits are taxable income so many of the benefit dollars paid out go right back to Ottawa. Both OAS and GIS have clawbacks, which mean that wealthy Canadians get absolutely no benefits out of either program.

Further, OAS benefits rise with the Consumer Price Index not wage growth. And it is fair to assume that the economy and wages will grow faster than the cost of living. On that assumption, OAS costs that are 2.3 per cent of GDP today will rise to 3.1 per cent by 2030. And by 2050, as the baby boom dies off, that cost will be 2.7 per cent of GDP.

Is it sustainable?

That’s for others to decide, but we need to understand that the rise in OAS costs will require an additional 0.73 per cent of GDP, not a tripling in the effective cost as the rise from $36 billion to $108 billion given is meant to have you conclude.

Finally, should Canadian workers have to work until age 67? Is that good public policy?

Clearly, we need to do something about the rapidly rising dependency ratios as we head to the date where some projections indicate that if nothing is done there might only be two workers for each retiree. But the reality is that the average Canadian worker today retires at age 62, not at age 65. There is strong research that shows that if we could induce every worker to stay in the labour force until age 65 (not 67) that these dependency ratio issues would evaporate.

So, working to age 67 is not necessary and may not be good public policy.

Raising the average retirement age is good public policy and raising the eligibility age for OAS is worthy of public debate. But this debate should be based on relevant and meaningful facts not misleading impressions.

Robert L. Brown is an expert adviser with EvidenceNetwork.ca, a fellow with the Canadian Institute of Actuaries, former professor of actuarial science at the University of Waterloo and past president of the Canadian Institute of Actuaries.