Economics

Insights from the OECD’s Pensions at a Glance 2017

On December 5th, the OECD published its biennial flagship publication Pensions at a Glance. The 2017 edition again provides a trove of interesting data; here are a few highlights from this year’s survey (all figures below are from OECD Pensions at a Glance 2017). [Read more…]

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.

 

Vampire Beaver or Cuddly Canadian? The ‘Maple Revolutionaries’ Face an Identity Crisis

Canadians collectively hold some USD $2.4 trillion in assets in funded and private pension arrangements, representing 160% of GDP. Over USD $420 billion of these assets are held abroad, and many of Canada’s largest pension funds invest a significant portion of this capital in illiquid, long-term assets, such as transportation and municipal infrastructure. Investors favour these assets, since they tend to generate solid, stable returns over long periods of time.

[Read more…]

Warning to Finance Ministers: leaving some workers out of an expanded CPP could boost precarious employment

Despite having had few good things to say about CPP expansion in the past, Business Council of Canada CEO John Manley and Chamber of Commerce CEO Perrin Beatty now grudgingly endorse a modest, targeted enhancement of the Canada Pension Plan.  But could a benefit enhancement targeted at modest income-earners lead to more temporary, part-time, and low-wage employment?

[Read more…]

Poor Health Care and Food Security among Factors that Determine Higher Mental Distress among Inuit

The social determinants of health, including income, health care services, food security and housing, shape the health of the Inuit population.

Inuit women had higher average mental distress scores than Inuit men, according to a recent Statistics Canada report on the social determinants of health of higher mental health distress among the Inuit. Difficulty accessing health care, low or very low food security, living with physical chronic conditions and moderate to weak family ties were the four key predictors of mental health distress among Inuit men and women. [Read more…]

TFSAs: Regressive and Inefficient

As reported by Blacklock’s last week, more detailed data on Tax-Free Savings Accounts was released by Canada Revenue Agency in response to an opposition question in the House of Commons. Rhys Kesselman and others have made the point that raising the contribution limit to $10,000 annually will reduce the tax system’s overall progressivity and add to the future costs of Old Age Security and the Guaranteed Income Supplement. The newly released numbers also underscore the fact that, despite claims that TFSAs facilitate saving for retirement, they are an inefficient vehicle for retirement saving, and a poor substitute for pensions when it comes to ensuring secure and adequate incomes in retirement.

[Read more…]

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