02/08/2012 10:41 EST | Updated 04/09/2012 05:12 EDT

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.

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