Old Age Security: Budget Watchdog Says Government Pensions Sustainable In Long Term
OTTAWA - Canada is not facing a crisis over public pensions, the country's budget watchdog concludes in a report that appears to undermine the Harper government's claim that the system is unsustainable.
The analysis from Parliamentary Budget Officer Kevin Page set off a storm in the Commons on Wednesday, with opposition parties accusing government ministers of fear mongering and waging a war on poor seniors.
An agitated Finance Minister Jim Flaherty called Page "unbelievable, unreliable, incredible" in a short scrum with reporters after question period, but did not contradict the PBO's numbers.
And in the Commons, Human Resources Minister Diane Finley evoked the crisis in Europe — where she said public pensions drain as much as 15 per cent of gross domestic product — as what could happen in Canada.
Opposition critics responded that it was the government that lacked credibility on the issue, alleging that it had concocted a "crisis" where none existed in order to push its ideological agenda.
"Ideologically they don't believe in a public pension system," said the NDP's Peter Julian.
Liberal Leader Bob Rae warned the government that Canadians will have long memories and will have an option to stop the proposed cutbacks to Old Age Security in the next election.
"This government cannot control what happens to public expenditures beyond 2015 with respect to OAS," he said. "Canadian should not think they have no choice in the 2015 election."
The proposal to rein in spending on OAS was first announced by Prime Minister Stephen Harper in a speech in Davos last month.
Since, ministers said one option would be to raise the age of eligibility for OAS — which pays seniors an average of about $500 a month — to 67 from the current 65.
Page said the government may have other reasons for making the changes, but inability to pay for the benefits is not an issue either in the short term or long term. In fact, not only is the OAS sustainable, but Ottawa has room to sweeten benefits.
"PBO's updated long-term debt-to-GDP (gross domestic product) show that the federal fiscal structure is sustainable even under the baseline assumption that there is some additional enrichment to elderly benefit payments," the report states.
"This indicates that... the federal government could reduce revenue, increase program spending or some combination of both ... while maintaining fiscal sustainability."
Page's report breaks no new ground on the costs of OAS, or other government-financed income supports, such as the Guaranteed Income Supplement that goes only to poor seniors.
Nor does it deny that 20 years from now, the number of Canadians receiving these benefits will double as the bulging baby-boomer cohort moves through retirement years.
The PBO also agrees with the government that costs are slated to rise from the current $36 billion to about $108 billion in 2030 once inflation is factored in.
In fact, Page believes Ottawa will want to sweeten benefits so seniors don't fall behind other segments of the population, meaning the costs would peak at about $142 billion by the mid-2030s.
For weeks, Harper ministers have described this scenario as a "crisis" and an "unsustainable" run-up in costs.
But Page said looking at the problem in terms of ballooning costs misses the fact that the economy will also expand during that period, as will Ottawa's coffers.
"It's scary. You can mislead people by saying, 'Oh, it's going to double,' " Page said in an interview.
"But (by 2030), the size of the economy is going to be more than double, and budgetary revenues will double. You cannot argue the government has a fiscal sustainability problem."
Toronto-based economist Dale Orr, who follows fiscal issues closely, agreed with Page that elderly benefits are sustainable, although he said raising the retirement age to 67 make sense given that people live longer.
"Compared to other countries, Canada is in very good shape fiscally," he said, noting that elderly benefits represent a small slice of the economic pie.
Ottawa is also in better position to absorb the OAS cost increases because, in December, it acted on future health costs, pegging increases to economic growth plus inflation, Page said.
That helped create fiscal room worth about 0.4 per cent of GDP, or about $7 billion in today's dollars. And it set the government on a track where the national debt as a ratio of GDP can decline even as the boomers move into retirement.
Page said OAS and GIS should be thought of not in nominal terms, as the government is presenting the issue, but in relation to the size of the economy.
By that calculation, costs peak at 3.2 per cent of gross domestic product, about one point higher than the current burden, 25 years from now. That's still one-fifth the burden that Finley cited for some European countries.
As a part of federal program spending, elderly benefits do rise from the current 14.8 per cent to 20.9 per cent in 2030-31, before beginning a long and slow decline to current levels.
"Yeah, it's going to go up, and then it's going to go down, so where's the crisis?" said Page. "They've provided no analytical support."
The Office of the Chief Actuary, a government agency, has produced a similar cost analysis to Page.
A 2010 paper commissioned by the Finance Department also concluded "the public retirement income system is financially sustainable."
The new report suggests that the debate over public pensions should be about priorities, not necessity.
Despite his finding, Page said the government is correct in dealing with the issue of aging. He added that while sustainability is not a problem, Ottawa may want to clear fiscal room so it can deal with other challenges.
OAS vs CPP
Here is a look at OAS and the CPP and how they differ. (Getty) <em>With files from CBC</em>
What is OAS?
The Old Age Security pension is a monthly payment available to Canadians aged 65 and older who apply and meet certain requirements. Unlike CPP, it is not dependent on a person's employment history and a person does not need to be retired from a job to qualify. The government adjusts the OAS payment every three months to account for increases in the cost of living according to the Consumer Price Index. The average monthly amount was $508.35 in the last quarter of 2011. The maximum payout for the first quarter of 2012 is $540.12. There are also supplementary programs, including the Guaranteed Income Supplement, which provide additional income to low-income seniors. The government claws back OAS payments from high-income Canadians. In 2011, for example, if you were retired but had an income of more than $67,668 (from things like pensions and personal investments), the government would reclaim part of your OAS payment - 15 cents for every dollar of income that you had above the $67,668 threshold. That means that if you were retired with an annual income of around $110,000 or more in 2011, your OAS payout would be reduced to zero. (alamy)
Who Is Eligible?
OAS is available to Canadian citizens and legal residents living in the country who have spent at least 10 years in Canada after they turned 18. It is also open to people outside of the country who were Canadian citizens or legal residents on the day they left the country, as long as they spent at least 20 years of their adult life in Canada. (Getty)
When Should You Apply?
A person should apply for OAS six months before they turn 65. If you have not lived in Canada continuously or were not born in Canada, the government requires a statement containing all the dates when you entered and left the country. It may also ask for supporting documentation. If a person applies after age 65, they can receive up to 11 months in retroactive payments along with a payout for the month in which a person applies to receive OAS. So if a person applied after their 66th birthday, they would receive 12 months of OAS payments. (<a href="http://www.flickr.com/photos/elwillo/" target="_hplink">Flickr:Keith Williamson</a>)
How Is The Rate Calculated?
In order to qualify for a full pension, a person must have lived in Canada for at least 40 years after turning 18. People also qualify if they reached the age of 25 on or before July 1, 1977, and either lived in Canada, had some residency in the country after age 18, or held a valid Canadian immigration visa and spent the 10 years immediately before appying in Canada. For those who do not qualify for a full pension, a partial amount is paid out based on the number of years spent living in Canada. For instance, if a person has spent 36 years of their adult life in the country, they will earn 36/40th of the full OAS amount. Based on the eligibilty requirements, the minimum payout is one-quarter of the total, to account for a total of 10 years spent in Canada. Once a partial pension has been approved, the percentage of the total OAS pension received will never increase even if a person spends more years in Canada. (Matt Cardy/Getty Images)
What Is CPP?
The Canada Pension Plan is a form of retirement income that is open to all Canadians who have worked and paid into the system through deductions from their paycheques. The amount a person receives under the system depends on how much and for how long a person contributed, along with the age at which a person started receiving CPP payments. There are three types of CPP benefits: disability benefits, retirement pension and survivor benefits. For the purposes of clarity, this article focuses on retirement pension form of CPP. The average monthly CPP benefit in 2011 was $512.64. The maximum payment in 2012 is $987.67. The government adjusts the CPP rate every January to account for changes in cost of living as measured by the Consumer Price Index. According to Service Canada, "If you have lived and worked in Canada most years between age 18 and 65 and earned about the average Canadian wage ($39,100 in 2002), at age 65 you would receive a CPP retirement pension of about $788 a month." (Getty)
Who Is Eligible?
Anyone who has made a payment to CPP is eligible for full retirement pension benefits once they reach the age of 65. A person can begin receiving CPP anytime after age 60 if they stop working or reduce their income, although they incur a financial penalty by doing so. In 2012, a person receiving CPP early will be subject to a 0.52 per cent reduction for each month before the age of 65 that they received payments. That number is slated to rise to 0.6 per cent each month in 2016. On the other hand, if a person chooses to delay CPP payments they receive a similar increase for each month they wait between the age of 65 and 70. In 2012, that increase works out to 0.64 per cent per month and will rise to 0.7 per cent next year. (alamy)
When Should You Apply?
This is really up to the individual and whether they want to receive a smaller or larger CPP benefit. However, the government recommends applying six months before a person wants their pension to begin. Canadians can apply online or print out an application and deliver it to a Service Canada location. Similar to OAS, a person can receive retroactive payments covering up to 12 months if they delay applying for CPP until after their 71st birthday. (alamy)
How Much Do I Contribute To CPP?
A person contributes 4.95 per cent of of their total pensionable income -- set at a maximum of $50,100 in 2012 -- to a total of $2,306.70 in contributions per year. Their employer contributes an equivalent amount. Self-employed people, on the other hand, must contribute both portions. Anyone earning less than $3,500 is automatically exempt from CPP contributions. At age 70, a person stops contributing to CPP even if they continue working. (alamy)