Fraser Institute Makes a Rickety Case for Boosting the Pension Eligibility Age

The Fraser Institute has a recent report looking at the rising eligibility age for public retirement programs in the OECD.

The report contrasts Canada’s decision in 2016 to cancel scheduled increases in the eligibility age for OAS, GIS and the Allowance on the one hand, with the general trend toward a rising age of eligibility in many OECD countries on the other.

At times, the Institute’s primary argument seems to be “everyone else is doing it, therefore we should be as well” – an unconvincing argument for an important policy change.

At other times, the report tries to suggest that Canada should follow other countries and increase eligibility ages to counteract the rising public expense of ageing populations.

But this argument confronts a series of problems:

1. The fiscal case for increasing OAS program eligibility ages was always weak. The cost of the 2016 decision to cancel the scheduled increase in the age of eligibility for OAS/GIS represents 0.3% of GDP in 2030, hardly an unmanageable expense, and the enhancement of the CPP/QPP will further reduce GIS expenditures.

Governments in Canada could take several steps today in order to compensate for this future cost increase and prepare for an ageing society, including implementing a single-payer drug insurance program in Canada. By lowering Canadian drug costs to the OECD average, this innovation is expected to produce net savings of approximately $11 billion, equivalent to the $10.4 billion in additional OAS program outlay resulting from the changes.

2. In comparative terms, Canada spends relatively little on public pensions. Whether measured as a share of GDP or as a percentage of total government spending, public expenditure on old-age benefits in Canada falls well below the OECD average.

 

Source: OECD Pensions at a Glance 2017, table 7.3

 

Source: OECD Pensions at a Glance 2017, table 7.3

Nor has Canada experienced particularly rapid growth in government spending on public pension benefits. Over the period between 2000 and 2013, public expenditures on old-age and survivors benefits as a share of GDP grew roughly 9%, placing Canada in the bottom half of OECD states.

Source: OECD Pensions at a Glance 2017, table 7.3

3. Increasing pension eligibility ages worsens inequality in old age, with its own fiscal consequences. As the OECD’s “Preventing Ageing Unequally” study recently summarized:

Shorter lives of low-educated, poorer pensioners reduce their cumulated benefits proportionally more, regardless of the pension system. When the average three-year gap in life expectancy between low- and high-educated people at age 65 is considered, the pension wealth (the discounted stream of pension payments over retirement) of low-income individuals, relative to that of high-income retirees, falls further by about 12%, on average across countries. As a consequence, raising the retirement age will affect low-income workers proportionally more than higher-income workers [page 41].

In the OECD’s opinion, these additional losses from increases in the retirement age are relatively small, however. Focusing just on differences in life expectancy, if retirement ages were effectively increased by three years between 2015 and 2060 – and assuming life expectancy at 65 years increases by 4.2 years on average over this period – the relative pension wealth of the low-income versus high-income groups would be reduced by 2.2% on average across countries.

However, the gap in life expectancy may very well grow even as average life expectancy increases, and as the OECD concedes, the calculation above assumes that people will work until the new, higher normal retirement age. But increases in the statutory retirement age will likely raise the effective retirement age less for low-educated than high-educated workers, given the socio-economic differences in health status and employment rates. The negative impact of higher retirement ages on the accumulated pension wealth of low-income individuals is therefore likely to be greater.

As was noted in early 2012, when Harper announced the retirement age increases, delaying access for low-income seniors to public pensions could be expected to increase social assistance expenditures and the cost of other supports for low-income individuals.

4. Canada’s employment rates among those between age 55 and 69 are already above the OECD average (and rising), so it’s unclear why higher retirement ages are needed to compel people to work longer.

Two last points worth noting: pension policy has fluctuated in recent years, and not only in Canada (Poland has just reduced their eligibility age, and in 2014 Germany allowed long-service workers to retire with a full pension at age 63). Of the six OECD countries that changed their retirement age between 2015 and 2017, three reduced the long-term planned retirement age. It’s possible that retirement ages could continue to fluctuate in the future.

And in many cases, OECD countries planning increases in the eligibility age are starting from retirement ages below age 65. The retirement age is projected to increase from 64.0 on average in the OECD in 2014 to 65.5 by 2060, based on current legislation, and men entering the labour market at age 20 will still be able to retire before 65 in Slovenia, Luxembourg, Greece and France. Most of this nuance was (predictably) lost in the Fraser report, unfortunately.

 

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  1. […] Public spending on old-age benefits in Canada falls well below the OECD average, but the flip side is that Canada spends a comparatively large share of GDP on private pension […]

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