Why OAS needs a makeover

I have mixed feelings about the government’s recent announcement of its intent to preserve eligibility for old-age security at age 65. That’s because I no longer know what purpose OAS is supposed to serve.

It wasn’t always like this. Back in 1966, when the government lowered the starting age for OAS to age 65 from 70 , there were many reasons why the change made eminent sense. The problem is that almost none of those reasons apply today.

Read: Trudeau says budget will commit to returning eligibility for OAS to 65

Half a century ago, the commencement of government pensions at age 65 or even earlier was the norm in developed countries. By reducing the commencement age of OAS to 65, Canada was merely falling in line. Today, virtually all developed countries, including the United States, are phasing in age 67 or 68 as the point of full eligibility for government pensions.

This latest global trend is the result of increasing longevity and strained finances, both of which affect Canada as much as any country. By restoring OAS to age 65, Canada would be the only developed country swimming against the stream.

The poverty rate among seniors in 1966 was nearly 40per cent, which meant there was a crying need for OAS to start at 65. Today, the poverty rate is about six per cent for seniors but nearly double that for the working-age population. While the poverty rate would rise a little if the government pushed OAS back to age 67, isn’t the plight of the working-age population a higher priority?

In 1966, there were more than six workers for every retiree, so those still in the workforce were able to comfortably bear the cost of an improved OAS pension. The worker-to-retiree ratio today is closer to 4:1. Within 20 years, it will be just a shade above 2:1. As a result, paying for OAS will become more problematic. In addition, the already troubling cost of health care in Canada (currently about 11 per cent of GDP) is expected to rise another 50 per cent in real terms. It’s not clear where the money will come from.

Read: The impact of returning OAS to age 65

In the 1960s, the size of the workforce was on the brink of an extraordinary expansion thanks to the baby boomers reaching working age and a growing number of women going to work. Any mechanism like OAS that would allow older people to exit the workforce and thus make room for young workers was more than welcome. Today, the workforce is shrinking and no amount of immigration will cover the shortfall. Government-paid incentives to retire early no longer make sense.

In 1966, life expectancy at age 65 was a mere 14 years (for males), of which maybe half might be spent in good health. Who could begrudge the seniors of that time the right to retire at age 65 and, in the process, give them a little more financial security to allow it to happen?

Today, life expectancy at age 65 is more than 21 years for males and about 25 years for females. While people should be able to retire when they want, should we be using taxpayer dollars to encourage them to spend a quarter century of their lives in leisure?

Employers in the 1960s could impose mandatory retirement at age 65 without offering any severance. With mandatory retirement at 65 the law of the land, how could a government not provide a universal pension at age 65? Governments have since abolished mandatory retirement, presumably on the basis that the average 65-year-old is willing and able to continue working. OAS at 65, however, is presumably justified on the basis that the average 65-year-old is unwilling or unable to continue to work. We can’t have it both ways.

Read: Employers must do more to help staff transition to retirement

Clearly, the case for starting OAS at 65 is much less compelling than it was 50 years ago. And yet, we have trouble letting it go. There are several reasons why this is the case, not the least of which is that OAS at 65 is seen as an entitlement and Canadians, like people everywhere, don’t like to lose their entitlements even when they no longer serve their original purpose.

A better reason to keep OAS commencement at 65 is that some retirees will indeed slip into poverty, at least for a couple of years, if the government moves the commencement age to 67. That will happen through no fault of their own because there are many people in their 60s who would love to keep working but have trouble finding suitable employment or suffer some disability that prevents them from doing so.

Read: Rethink your approach towards mature employees

I’m sympathetic to this rationale for paying OAS from age 65 even though I know it’s flawed. The flaw is that there’s nothing magical about age 65. People can become disabled at any age. Even able-bodied employees have trouble finding a good job at age 60 and yet we’re not using this reality as an argument to reduce the OAS commencement age to 60 or less.

Returning to the ambivalence that I declared at the outset, the case for OAS at 65 used to be straightforward because it was purely and simply protection from poverty in old age. OAS has morphed away from that because age 65 isn’t even considered old anymore.

OAS now also serves as a buffer against unemployment and premature disability. To the extent that has become its new rationale, a more targeted program than OAS could no doubt more efficiently serve the needs of the older unemployed and those with disabilities. If the government created such a program, we shouldn’t object to OAS starting at age 67 or even 70.

The future of OAS has been in the news lately with the federal government expected to return eligibility to age 65. Is that the right move?

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