Why raising OAS to 67 doesn't make sense
Prime Minister Stephen Harper raised eyebrows with a speech last week that fueled speculation he plans to lift the eligibility for Old Age Security to 67 (from 65).
Harper’s argument that deep cuts are required to keep the program afloat deserves closer attention, even though he’s been backpedalling ever since.
I have two points to make:
— There is nothing new in the numbers he quotes about OAS costs rising as baby boomers retire.
— There are ways to reduce costs that won’t incense Opposition parties and organized seniors’ groups.
Let’s start with the statistics, which show that taxpaid pensions for people over 65 will triple to $108 billion by 2030 (from $35.6 billion in 2010).
The Conservative government seems spooked by this figure. But why should it be?
When looked at in the context of Canada’s growing economy, the cost of supporting the demographic bulge is not nearly as scary. As a percentage of our gross domestic product, Old Age Security will rise to 3.1 per cent by 2030 (from 2.3 per cent in 2010) — before declining again after the boomers retire.
These statistics have been well-known and analyzed for many years.
“I’m mystified. Why talk about it now?” says Malcolm Hamilton, an actuary at Mercer Consulting, who’s been following the debate for years. “I’m looking at numbers and projections that I’ve been looking at for over a quarter of a century — without anyone in government saying there was an unmanageable problem.”
With lower fertility rates, one in three Canadians will be retired by 2030. Again, that’s old news.
“It’s always been known that costs would escalate,” Hamilton emphasizes. “Canadians have been led to believe this would be taken care of. Governments would absorb the costs or find economies elsewhere. They should have said something earlier if they had concerns.
“You can’t let people cruise up to retirement age without getting benefits they counted upon. It’s a little late to decide the system is unsustainable.”
And why did Harper increase the guaranteed income supplement (topping up OAS for low-income seniors) in his last budget without hinting that public pensions were under threat? That’s what Hamilton wants to know.
It’s clear the Conservatives are ideologically opposed to raising taxes. If they want to reform Old Age Security to spend money elsewhere, they can do so in other ways without making people wait two years to collect.
I asked a few observers for ideas about reducing the cost that wouldn’t pinch as hard as raising the eligibility age.
Here’s what they said:
Change the inflation indexing of OAS payments.
The OAS rates are adjusted every three months, while other program rates are adjusted once a year. Canada Pension Plan, for example, has only annual indexing.
“While inflation has been low, it had a spike last year. Over a period of time, this change will add up to a fair amount,” says Gordon Pape, author of a new book about retirement realities.
Change the way that OAS payments are taxed back.
Affluent seniors with an individual income of $69,562 have to repay some of their benefits. They lose all their benefits with net income of $112,772. “You can up the clawback rate — start it earlier or phase it out faster,” says John Stapleton, a retired public servant with an interest in social welfare.
“You can also disallow the phony deductions, such as the deductions for flow-through shares only available to well-to-do investors.”
Stop indexing the clawback income levels.
Conservative Finance Minister Michael Wilson didn’t index income levels when he brought in the OAS clawback in the 1990s, says Pape. Only when Jean Chretien’s Liberal government took power later was a change introduced to let the maximum income levels rise with inflation.
Lowering clawback levels or removing indexing on clawback thresholds won’t hurt as many people as raising the age to 67, says Jim Yih, a retirement blogger and consultant.
“If you take away two years of OAS, that’s $12,200 from every Canadian over the age of 65,” he says. “Before the government cuts the retirement income of taxpayers, they had better cut back on their overly lucrative gold-plated pensions first.”
Old Age Security, unlike CPP, is a means-tested program. It favours those without resources over those who have saved for retirement.
If changes are needed — and not everyone agrees they are — the government should tinker with the way it taxes back the OAS benefits instead of making across-the board cuts.
Why raising OAS to 67 doesn't make sense - Moneyville.ca
Prime Minister Stephen Harper raised eyebrows with a speech last week that fueled speculation he plans to lift the eligibility for Old Age Security to 67 (from 65).
Harper’s argument that deep cuts are required to keep the program afloat deserves closer attention, even though he’s been backpedalling ever since.
I have two points to make:
— There is nothing new in the numbers he quotes about OAS costs rising as baby boomers retire.
— There are ways to reduce costs that won’t incense Opposition parties and organized seniors’ groups.
Let’s start with the statistics, which show that taxpaid pensions for people over 65 will triple to $108 billion by 2030 (from $35.6 billion in 2010).
The Conservative government seems spooked by this figure. But why should it be?
When looked at in the context of Canada’s growing economy, the cost of supporting the demographic bulge is not nearly as scary. As a percentage of our gross domestic product, Old Age Security will rise to 3.1 per cent by 2030 (from 2.3 per cent in 2010) — before declining again after the boomers retire.
These statistics have been well-known and analyzed for many years.
“I’m mystified. Why talk about it now?” says Malcolm Hamilton, an actuary at Mercer Consulting, who’s been following the debate for years. “I’m looking at numbers and projections that I’ve been looking at for over a quarter of a century — without anyone in government saying there was an unmanageable problem.”
With lower fertility rates, one in three Canadians will be retired by 2030. Again, that’s old news.
“It’s always been known that costs would escalate,” Hamilton emphasizes. “Canadians have been led to believe this would be taken care of. Governments would absorb the costs or find economies elsewhere. They should have said something earlier if they had concerns.
“You can’t let people cruise up to retirement age without getting benefits they counted upon. It’s a little late to decide the system is unsustainable.”
And why did Harper increase the guaranteed income supplement (topping up OAS for low-income seniors) in his last budget without hinting that public pensions were under threat? That’s what Hamilton wants to know.
It’s clear the Conservatives are ideologically opposed to raising taxes. If they want to reform Old Age Security to spend money elsewhere, they can do so in other ways without making people wait two years to collect.
I asked a few observers for ideas about reducing the cost that wouldn’t pinch as hard as raising the eligibility age.
Here’s what they said:
Change the inflation indexing of OAS payments.
The OAS rates are adjusted every three months, while other program rates are adjusted once a year. Canada Pension Plan, for example, has only annual indexing.
“While inflation has been low, it had a spike last year. Over a period of time, this change will add up to a fair amount,” says Gordon Pape, author of a new book about retirement realities.
Change the way that OAS payments are taxed back.
Affluent seniors with an individual income of $69,562 have to repay some of their benefits. They lose all their benefits with net income of $112,772. “You can up the clawback rate — start it earlier or phase it out faster,” says John Stapleton, a retired public servant with an interest in social welfare.
“You can also disallow the phony deductions, such as the deductions for flow-through shares only available to well-to-do investors.”
Stop indexing the clawback income levels.
Conservative Finance Minister Michael Wilson didn’t index income levels when he brought in the OAS clawback in the 1990s, says Pape. Only when Jean Chretien’s Liberal government took power later was a change introduced to let the maximum income levels rise with inflation.
Lowering clawback levels or removing indexing on clawback thresholds won’t hurt as many people as raising the age to 67, says Jim Yih, a retirement blogger and consultant.
“If you take away two years of OAS, that’s $12,200 from every Canadian over the age of 65,” he says. “Before the government cuts the retirement income of taxpayers, they had better cut back on their overly lucrative gold-plated pensions first.”
Old Age Security, unlike CPP, is a means-tested program. It favours those without resources over those who have saved for retirement.
If changes are needed — and not everyone agrees they are — the government should tinker with the way it taxes back the OAS benefits instead of making across-the board cuts.
Why raising OAS to 67 doesn't make sense - Moneyville.ca
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