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People Need Less Money To Live As They Get Older? (Not Quite)

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CANADA PENSION
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Recently the C.D. Howe Institute released a short study just in time for the finance ministers' meeting - rolling out the tired, old argument that as people age, they do not need as much money to live as when they were younger. If only retirement were so easy.

The study focuses on public servants' pension plans in particular - including those of teachers and hospital workers -- arguing that indexing them to inflation is too generous. But at the same time the study acknowledges that the broad public system - including the Guaranteed Income Supplement, the Old Age Security pension, and the Canada (and Quebec) Pension Plans -- appropriately provide benefits which are fully indexed for inflation because they offer incomes to fund basic necessities.

So why the double standard on indexing for public system pensions but not public servants' pensions -- and all workplace pensions for that matter?

First let's look at the old chestnut that as we age, we don't need as much money. The study gives an image of Canadians' inexorable decline into frailty, especially after we reach age 75. They stress that we need to do our vacation travel while we still have our health, because after age 75, we'll be too disabled to travel or even to go to the movies or dine out. As a result, the study concludes, public sector workers can safely cut their pension contributions significantly by scaling back their plans' inflation protection.

This image is wrong from both a health and social perspective, and in terms of its economic analysis.

Of course, as we age, we're more likely to have a disabling condition. But the simple fact is that more than half of Canadians age 65, 75, and even 85, are not so disabled that they do not need a decent income. As we hear increasingly, "60 is the new 50," and so on up the age scale.

Also, expectations for individuals to pay for health and social care are increasing. Hospitals, doctors and drugs in most of Canada are covered by public health programs. But a substantial portion of health and social care costs are not covered, and depending on how much provincial governments cover the growing needs for home care and assisted living, these costs may increase significantly over coming decades.

There is broad agreement that most Canadians, given the choice, would rather live at home and not in an institution as they age - that costs money. Many would be able to age in place if they could have assistance with housekeeping and shopping, for example. But such assistance can be a substantial draw on post-retirement incomes.

Disappointingly, the study makes little or no reference to these realities. And the only Canadian data it shows are copied from a highly criticized McKinsey study (which fails the basic scientific canons of openness and replicability), in turn drawing on old (and sadly discontinued) Statistics Canada data up to only 2008.

So what did the C.D. Howe study conclude from these Canadian data?

They show the average levels of inflation-adjusted consumption from age 54 to 77 for those with "middle" incomes declining by almost 50 percent. Seems pretty clear, right?

Except the figures fail to take account of household size. That's quite an oversight.

Consumption at age 54 is typically for households with two or three or more members, while at age 77, these are households with only one or two members - a major difference. If the study had shown consumption per capita (as noted in a footnote), there would be no such dramatic decline.

If we look at these same C.D. Howe/McKinsey results, but this time comparing inflation-adjusted consumption levels of 65 (not 54) year olds to 77 year olds, the decline is only about 10 percent - not the kind of dramatic drop that would support a frontal attack on inflation indexing of public servants' pension plans.

Furthermore, the decline in real consumption from age 54 to age 65 is driven not only by declines in household size, but also by people withdrawing from paid work, and the general inadequacy of Canada's retirement income system to replace their incomes from work with decent pensions.

What we really need - instead of such worn out arguments against inflation protection based on poor evidence - is a reasoned and evidence-based public discussion of the consumption needs of Canadian seniors, both now and projected for coming decades.

Before we can sensibly discuss a wide range of pension policy questions, we'd better have facts based on sound analysis. Unfortunately, the C.D. Howe study misses the mark.

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