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.