A rumoured proposal by the federal government to increase the age of eligibility for Old Age Security (OAS) from age 65 fails to address the problem facing Canadians.
The trouble is not that increases in expenditures for OAS are unsustainable as the baby boomers begin to reach retirement age. Rather, Canadians are starting their working lives later than ever, living longer than ever and wish to retire — with lots of money — while in their late 50s or early 60s.
Making it clear this is the predicament shifts the debate from OAS to the Canada Pension Plan (CPP). After all, it is CPP that provides workers with a significant amount of retirement income.
Making sure Canadian workers can retire in comfort is possible in only two ways: Require workers to contribute more of their employment income to pension plans or require workers to stay employed longer. Neither will be popular but there is no magic bullet.
However, increasing the age of eligibility for OAS from 65 will accomplish neither. Workers do not contribute to OAS and it is paid to all Canadians, not only workers. So increasing its age of eligibility will not increase the retirement security of older Canadians but, rather, make it more precarious.
Many countries, including the United States, Britain and Germany, recently increased the eligibility age for work-related pensions. In contrast, in Canada, early retirement is still encouraged, with CPP benefits available at age 60 and many employer plans, especially those in the public sector, enticing workers into retirement while in their 50s. Canada’s incentive structure encourages people to retire early — exactly the opposite of what is needed today.
Not too surprisingly, when pension plans are structured to permit early retirement, pension payments to retirees are small. Over the past decades, governments, like individuals, have become enthralled with “Freedom 55.” This was great marketing but lousy public policy.
International experience shows retirement age reform is more likely to succeed when initiated well before longevity increases or funding problems occur. The U.S. made the decision to move the normal retirement age from 65 to 67 in the early 1980s, with the eligibility age for early payments rising from age 60 to 62, but the implementation began only in 2000 and will end in 2024. Many other countries have followed the U.S. lead, gradually increasing the age at which early pensions are paid to 62 and full payments to 67.
Canada’s CPP early retirement age at 60 is increasingly an exception when placed in an international perspective. However, increasing OAS to 67 would also be an exception as no country makes people without any work-related pension wait to age 67 for income assistance from the state.
Fixing pensions and providing a comfortable retirement for Canadians cannot be accomplished painlessly. But eligibility ages have been changed before. For example, until the 1960s, age 70 was the point at which the government provided support. It then changed to 65 and in the 1980s — at a time of increasing life expectancy — CPP lowered it again to 60.
The federal government, by wishing to reform OAS but leave CPP untouched, is failing to engage in strategic pension reform. Rather than rushing to address the wrong problem for the wrong reason, the federal Conservatives should learn from other nations.
Nearly all countries that have reformed income security for older people used independent expert commissions to examine the challenges of rising life expectancy, develop recommendations and build consensus. The work of those commissions ensured all political parties ultimately supported the policy reforms.
Raising the eligibility ages for workplace pensions will be more acceptable to workers if they understand the trade-offs: maintaining the current retirement age leads to less secure pensions, higher contributions and lower benefits; raising the retirement age leads to more secure pensions, stable contributions and higher benefits.
Understandably, politicians are loath to propose that people work longer. However, as with any medicine, the earlier you start, the more effective the results.
The creation of an independent expert commission on pension reform, followed by extensive consultations with citizens, are vital steps to protect and strengthen Canada’s income security programs.
Thomas Klassen is an associate professor in the department of political science at York University in Toronto.