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Monday, January 30, 2012

Old Age Security - By the Numbers

Part 2 of a series of commentaries on proposed chnages to the Canadian Old Age Security program.

OAS Changes – By the Numbers

If Ottawa increases age of eligibility for Old Age Security (OAS) from 65 to 67, forcing a large part of the population to continue working further into their so called “golden years” what will the impact be?

In an effort to understand the potential impacts lets assume the Harper government will, as stated, leave current OAS recipients alone and have no plans to change the rules for anyone close to retirement. The actual age range that would be affected is as yet unknown but for the purposes of this evaluation let’s assume those within 5 years of eligibility (those already 60 or over) won’t be impacted.

Canada has an estimated population of 34.5 million citizens. Currently 27.5 million are under the age of 60 and would be directly impacted. Due to the low number of people with adequate company pension programs in Canada it’s a fair assumption that a large portion of these people would have to find other means of support when they retire, or they would have to ontinue working longer in order to receive less OAS from age 67 onward. (Lower benefits naturally result from collecting from a shorter period of time between enrolment and death).

The 27.5 million affected represent 80% of Canada’s population.

There’s more.

The reason Ottawa says it needs to make these changes is the large number of baby boomers about to retire (driving up the cost of the program) making it unsustainable. With that in mind one has to consider the long term outlook, not just the next decade or two.

Based on Canada’s age demographics the increased cost of baby boomer retirements will peak around 2031 and then begin to taper off as less boomers enter the program and more begin to pass away and are no longer in the system. After that point the cost of OAS will begin to drop off and eventually end up at an even lower cost (as a % of GDP) than it is today.

Approximately 30% of Canadians are between 45 and 59 and these individuals would be the most severely impacted. Many of these people are already in their “best earning years” and many will find it difficult to find ways of growing any soft of alternate retirement funds over the limited amount of time remaining before retirement. As a result they will have to make some tough decisions, either delaying retirement or looking for ways to offset those missing two years over a relatively short period, if they can even afford to invest any of their income in a volatile market.

Those who are unemployed or on social programs will also be in peril as they’ll continue to be dependent on provincial social programs for the intervening years.

Consider as well that a full 50% of today’s population, or more than 17 million Canadians, are currently under the age of 45. This means that even though they have more time to prepare for their future they will be affected regardless. These Canadians may have more time to prepare but is it really necessary to make these people the first generation to be forced into coping with less than the generation before them?

Even under the existing rules that allow for retirement at 65, anyone under 45 would not be eligible for OAS until at least 2032 or in most cases, many years later. This means that long after the increased cost of the baby boomer bulge has passed and when costs are dropping off these Canadians will still be forced to work longer for less pension dollars.

While the numbers touted by Conservative pundits may seem staggering, with costs growing from 36 Billion to 108 Billion by 2031, those numbers don’t tell the entire story.

Over the same period projections also show Canada’s GDP increasing at a healthy rate right along with the cost of OAS. The more accurate measurement to consider is the cost as a percent of Canada’s GDP. This measurement shows us that even at the height of the “bulge” (2031) the overall cost of the program is only expected reach 3.14% of GDP, a very sustainable number. Currently the cost sits at 2.41%. That’s a total increase of less than 1% of GDP (0.73% to be precise) after which the costs start to decrease at an ever increasing rate, eventually ending up even lower than the current level

The current government claims we only have to look to Greece or other European nations to see what happens when pension plans grow out of control. Never mind that the problems in some EU countries are the result of many complex issues that extend beyond public pensions, that’s the line they have decided to push.

When you consider that even 5 years ago France’s public pension plan cost about 10% of GDP, the UK 6.6%, Germany 10.4% and the EU at about 10%. Those numbers are hardly comparable to 3.14% 20 years from now. In fact the numbers show that rather than being a crisis, Canada’s temporary bubble in OAS cost is actually little more than a minor inconvenience.

In the end the numbers tell us that by increasing the age requirement in order to address a short term “bulge” Ottawa stands to benefit greatly from reduced program costs in later years while still forcing aging workers to remain in the workforce longer.

The benefits to Ottawa identified above don’t even include the added tax revenue generated from the quasi-enslaved workers, or additional impacts to workers such as the added tax burden they’ll face on a provincial level as the provinces are forced to extend existing social services program payments for low income individual past the age of 65 and until they are eligible for OAS at 67.

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