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.

 

Who gets to decide the price of a bus ticket?

Will pension funds own and operate the next generation of mass transit in Canada?

Like other large investment funds, pension funds in Canada and around the world have a lot of assets to put to work, and not enough attractive investment opportunities. This is intensifying pressure to get access to projects that historically have been the preserve of public sector.  It may also be driving pension funds to take on more risk. [Read more…]

Newfoundland budget and public sector jobs

Newfoundland and Labrador’s provincial 2016/17 budget will be tabled this afternoon and there’s concern about what it will include.  Everyone expects some tax and revenue hikes and spending cuts to deal with the deficit most recently forecast at $2.4 billion.

There’s a lot of speculation about what the government will include in this budget.  Then there will be more about what will be in the second budget the Minister said will be coming later this year.   One thing it shouldn’t include are cuts to public sector jobs because that will just make the situation worse.  The province’s unemployment rate has increased above 14% in the last few months, a rate it hasn’t experience since 2010.  This rate very well may get worse as more unemployed workers return from Alberta.

There may be a misconception that public sector employment in the province has expanded as the economy was doing well and revenues were flowing in but in fact the opposite is true.   Public sector employment in Newfoundland and Labrador is actually now at a record low as a share of total employment in the province and is down by 18% in terms of actual jobs from just three years ago.  In the first quarter of 2016, there were and average of 58,400 public sector workers in Newfoundland and Labrador.  This is a drop of -12,600 or 18% from the 71,000 public sector workers recorded in the province in 2013, according to Statistics Canada’s Labour Force Survey (Cansim tables 282-0088 and 282-0089).

PS Jobs to 2016Q1

 

Public sector employment in the province dropped to a 25.3% share of total employment in the province in the first quarter of this year.  This is the lowest it has been since these figures were first collected 40 years ago (see chart) and well below the 40 year average of 30.2%.   If they were just at this long-term average, there would be 69,700 public sector workers in the province: more than 11,000 than there are now.

This means fewer public sector workers are working harder to deliver the public services for Newfoundlanders.  These needs will increase as unemployment rises and the province is in recession.  Further cuts to public sector jobs will not only mean cuts to public services, but will also have a terribly negative impact on other jobs in the province.  Every ten jobs cut in the public sector will lead to about another 5 jobs lost in the private and public sector in the provinces, according to employment multipliers from Statistics Canada.

As federal Finance minister Bill Morneau stated, “The right approach is to invest in the economy” and not to cut spending.   There’s good opportunity to generate additional revenues because Newfoundland’s tax rates were cut during the boom times.  Estimates are the province could generate an additional $800 million annually by aligning its tax rates with other provinces and adopting a more progressive tax system.   Tax increases, especially for high incomes and corporations, have a much smaller negative impact on the economy than spending cuts do.

Then there are some of the questionable government spending decisions, such as the costs and revenues associated with the controversial $8 billion Muskrat falls project–but that may have to wait until Newfoundland’s 2016/17 Budget Ver 2.0

 

Fraser Institute looks through the wrong end of the telescope

The Fraser Institute, a right wing think tank, has released a new report about barriers to internal trade and labour mobility in Canada. There’s a lot to dissect in the report, but I’d like to comment on the part that deals with labour mobility (geographic). [Read more…]

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