February 1, 2012 – In a column for iPolitics published today, MLI’s Jason Clemens says that rhetoric and indignation on pension reform is getting in the way of informed, constructive dialogue. An excerpt below:
There is no doubt that the aging of society will have profound consequences. Changes will have to be made, either incrementally in advance based on broad support, or reactively to a crisis down the road. For the former to occur, we must as a society engage in an open and honest dialogue about the costs of an aging society, reform options available, and what is genuinely and equitably affordable.
Clemens also appeared on Ottawa’s CFRA radio yesterday (January 31, 2012) with Michael Harris and the Afternoon Edition with Rob Snow to discuss pension reform (click the links to listen to the interview). The full iPolitics column is below.
iPolitics: Noise on pension reform impedes honest dialogue
By Jason Clemens, iPolitics, February 1, 2012
Prime Minister Harper made a stir at Davos, Switzerland last week by talking about “transformational” reforms covering pensions, energy, and regulations. His suggestion of changes to Old Age Security (OAS) and possibly public pensions more broadly garnered enormous attention. Unfortunately, the lion’s share of the discussion to-date has been more heated rhetoric and indignation than informed, constructive dialogue. There is no doubt that Canada, like other industrial countries is facing an aging society. The government has shown leadership in raising an issue that will have to be solved either proactively and thoughtfully now, or reactively and potentially in crisis in the future.
The late Democratic Senator from New York, Daniel Patrick Moynihan famously said that everyone is entitled to their own opinion but not their own facts. So, as we now debate possible reform of Canada’s public pensions what facts are pertinent in helping us discern productive from unproductive reforms.
The Macdonald-Laurier Institute commissioned a study by McGill economist and former senior finance department official, Christopher Ragan, to estimate the coming demographic deficit. Ragan calculated that by 2040 Canada would face a $67 billion deficit (in today’s dollars) based on current policies and demographic change.
We already see some of these pressures in the projected costs for OAS and related seniors’ income programs. The federal government expects retirement income programs to increase from $35.9 billion last year to $46.7 billion by 2015-16, an increase of 30 percent in just five years. By 2015-16, these retirement income programs will consume almost one of every five dollars of federal program spending.
This calculus does not necessarily mean the programs are unsustainable. What it means is that retirement income programs will increasingly consume a larger share of government spending. This means that other spending will have to be cut, taxes increased, or new borrowing. If the last two options are unacceptable, then it means reforming these programs to more effectively achieve stated goals or cutting other spending. It is unacceptable for those opposing reforms to avoid specifically explaining what other spending will be cut or taxes increased.
The rumoured change in OAS is that the age of eligibility will be increased to 67 over an extended time period, perhaps ten years. This is actually quite timid. Consider that when the Canada Pension Plan was introduced (1966), life expectancy was 72 years(combined male-female life expectancy), implying a benefit period of 7 years. Life expectancy now stands at 81, implying a benefit period of 16 years or more than double the original period. Put another way, the age of eligibility would be 74 years today if the original threshold had been indexed to life expectancy.
One particularly emotional aspect of the debate has been the implementation period. Many reform opponents have argued that current seniors will be affected. Any change to the age of eligibility must be implemented over time, which is one of the central reasons for trying to avoid crisis and deal with program deficiencies proactively.
Individuals and families need time to adjust their expectations and savings behaviour to reflect the new reality. A ten-year period is probably the absolute minimum time period needed to implement such changes. Given the data presented above, it’s worth considering an increase beyond 67 years of age for eligibility but coupling the larger increase with a much longer period of implementation.
Another misunderstanding is that the government is proposing a change in the retirement age. This is simply not correct. The government is considering a change in the age of eligibility for some or all public retirement programs. This in no way prevents workers, particularly younger workers from adjusting their savings to ensure sufficient assets to retire at age 65. What would change is the mix of public and private income at age 65.
Particular attention should be paid to low-income seniors during deliberations. OAS is designed to provide 15 percent of the average wage in retirement. However, the combination of OAS and the Guaranteed Income Supplement (GIS) provide much higher levels of income support for lower-income seniors.
The federal government has to ensure that whatever changes it makes are integrated with laws and regulations governing private savings and provincial programs. There’s little use simply downloading costs to the provinces for low-income retirement programs, for instance, since the net savings would ultimately be zero.
Federal reforms also need to remove barriers for older workers to remain in the labour force and coordinate with the provinces for similar changes. If the age of eligibility is raised for public programs, other options, including work and greater private savings must be available.
Finally, some portion of the savings from reforms should be used to enhance private savings options. RRSPs and TFSAs, for example, could be expanded to afford individuals an opportunity to better save privately.
There is no doubt that the aging of society will have profound consequences. Changes will have to be made, either incrementally in advance based on broad support, or reactively to a crisis down the road. For the former to occur, we must as a society engage in an open and honest dialogue about the costs of an aging society, reform options available, and what is genuinely and equitably affordable.
Jason Clemens is the director of research at the Macdonald-Laurier Institute.
