After a number of false starts (and there may be more yet), the goal of pension reform in Canada seems to have zeroed in on helping middle-income Canadians maintain their standard of living into retirement.

We have come to accept that lower-income groups are already fairly well served by the current retirement system, even if they don’t save a cent in an RRSP. We also know that outright poverty is not a major problem among seniors (with the exception of certain groups such as single elderly women). If any one large group needs more help though, it is middle-income earners.

So far, it seems the best way to help them is to enhance the Canada Pension Plan (Pillar 2) or perhaps broaden coverage via pooled registered pension plans. In debating these possibilities, we have virtually ignored Pillar 1—which consists of old age security (OAS) and its companion program, the Guaranteed Income Supplement (GIS). We have implicitly assumed they are generally working well.

This assumption may be erroneous. While OAS and GIS combined are the primary reason that poverty is so low among seniors, the programs are suffering a slow, long-term deterioration that is most detrimental to middle-income Canadians.

OAS and GIS are worth a little less to each year’s crop of new retirees. You might ask, How can this be? After all, payments are fully indexed to the consumer price index (CPI) so they should be keeping up nicely with price inflation. This is true, but they are not keeping up with the earnings of the typical wage earner.

The average earnings of retiring workers rise more quickly than price inflation in most years. Over the 90-year period ending in 2013, the CPI has been rising by 2.9% per annum, on average, versus 4.3% for the average industrial wage. This annual differential of 1.4 percentage points may not seem like much, but it ends up being quite significant over longer periods.

A 2010 C.D. Howe paper by Robson and Moore predicts that if the OAS indexing formula is not changed, nearly half the retiring population of 2050 will suffer a decline in their disposable income in retirement of at least 25%.

The question is whether we need to do something about this. That “something,” by the way, would be to index the maximum OAS and GIS payable to new retirees to the average industrial wage. Once payments start for a given individual, future payments would then be indexed to the CPI. But should we be doing this?

There are some arguments against doing this. One is cost. It is barely a year since the federal government moved the OAS retirement age to 67 from 65, ostensibly because of demographic considerations but equally because of cost, so it is unlikely to be keen to add the cost back in by making a change that the electorate will barely be able to comprehend, much less appreciate.

The second reason to maintain the status quo is that the current indexing formula is good enough if all we want to do is keep most seniors out of poverty.

The third and final reason not to change the OAS indexing formula is that the C.D. Howe paper is based on a rather shaky assumption (and may I hasten to add that the authors of the paper would be the first to recognize it). Their forecast assumes that human behaviour would remain constant while this slow deterioration is taking place.

In fact, people will almost certainly modify their behaviour to mitigate the damage, either by retiring later or by saving more. We shouldn’t take too much comfort in this, though. Low- and middle-income households are struggling to meet their current expenses during their working lifetimes, and saving more would drop their standard of living even more. Moreover, not everyone can retire later. Employees tend to be pushed into retirement earlier than they planned, and many of them will not be able to find comparable employment again, even on a part-time basis, because of apparent discrimination against hiring older employees.

From where I’m sitting, none of these arguments to maintain the status quo seems very compelling. OAS and GIS are very important to middle-income Canadians, and I see no reason to diminish their role, certainly not in such a surreptitious manner. This issue needs to be given more attention.

Fred Vettese is a partner and actuary at Morneau Shepell. These are the views of the author and not necessarily those of Morneau Shepell or Benefits Canada.
Copyright © 2018 Transcontinental Media G.P. Originally published on

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See all comments Recent Comments

Karen Fehr:

I am one of the single women (63 years old); have been through three rounds of cancer, now have austioarthritis; and other health conditions (I do receive cpp disability benefits). I currently receive 1170. My teeth are falling out and I have not been able to buy new clothes for years..I have two pairs of pants, no winter boots, no winter coat…can’t afford to buy. The yearly increases are kind of a joke. A lot is based on the price of oil….who can afford to buy and insure a vehicle? I worked since I was 13 years old and never expected to end my years like this. People on Welfare Disability at least get all their medical, dental and optical needs taken care of; and I know some who have worked very little in their lives. I can’t believe how seniors are treated. Oh, yeah, and then the federal government taxes me on my huge CPP…I owe them money I can’t pay…..go figure…..

Saturday, November 21 at 10:48 am | Reply


Perhaps if this government went around and met seniors where they live and I’m not talking about the ones that live in the 3 to 4 thousand dollar a month senior resiidencys in there ivory towers.They might see how we actually live. Even hamburger is $10.00 a month where the last time I could afford it was $5.00. A $5.00 increase.Cost of living increase might cover a package of hamburger so it looks like we can now eat ichiban and hamburger once a month. A rental apt. is about at the lowest in Red Deer is $9.00 a month. Look whats left over.Some people should be ashamed of themselves

Thursday, June 09 at 1:51 pm

gary prokovich:

I am also dealing with cancer problems [prostate] surgery then 3 dozen radiation bouts. which cooked my insides disabled me to work. I received GIS that I qualified for then they said I earned too much..they took away $200.00 a month. give to you then take it away. how does that make sense? rent, food and p/x’s are killing me. maybe us Canadians should be refugee’s. get their priorities right.

Monday, November 30 at 2:58 pm | Reply

Carolyn Guest:

I am upset that the Canadian Government has see it in there wisdom to give the seniors a small increase we are struggling to make ends meet but I speak to my grandchildren and they get almost that amt when having there children we where lucky to get 20.00 an month these kids get hunders and they never have paid taxes like we did some thing wrong with this government to say we are only good enough to eat hamburger and live in a 1 bedroom place as that is all we can afford and to do this we sit in it all the time as we have no funds to do any-thing . Thanks government for bringingall these people from other countries when we cant take care of our oldest residence that made this country

Friday, September 30 at 3:49 pm | Reply

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