The Internet is afire with news that the Conservative government of Canada is planning to raise the minimum age for Old Age Security, as part of a comprehensive government-wide cost-cutting measure for the upcoming federal budget. I first heard about this news from my grandmother, who was scared that her benefits were going to be personally cut.
So, what is going on? Are current retirees going to be shoved out into the cold and shown the door? Is the government planning on impoverishing old people? What is actually going to happen?
First, it will help to enumerate what Canada’s current provisions for aged retirees is currently like. Here are the major programs:
Old Age Security (OAS): This is a form of financial assistance for retirees aged 65 and older, who have lived in Canada for at least 10 years. The money is allocated based on time in Canada; those who have been in Canada for at least 40 years will get the full payment, while those who have been in Canada for less will get a fraction of the payment. For example, someone who has been in Canada for 20 years would be eligible for a OAS payment of 20/40 or 50% of the amount.
The average payment is $508.35/month as of October 2011, however, those who have saved and invested for themselves and have a good income must repay part or all of their OAS benefits. Those who make at least $69,562 must start paying back part of the benefit, and those who make more than $112,772 must pay back the full amount. More information can be found on the government website.
Guaranteed Income Supplement (GIS): In addition to OAS, the government also provides a guaranteed income supplement for those with low income. The payment starts declining at an income of $16,368, and stops entirely at an income of $39,264.
Canada Pension Plan (CPP): This is the equivalent of Social Security in the U.S. and is funded by a 9.9% flat tax on income earned between $3,500 and $45,900. Twenty years ago, this burden was only 3.6%. This is therefore a regressive tax that hits lower-income earners much harder than higher-income earners, and these lower-income earners are forced to “invest” their money with the government. The government does not actually invest most of these payments, but instead uses them to pay out current retirees. On this basis, it is actuarially sound, but only on the assumption of future taxpayers continuing to pay into the fund, and likely at higher burdens.
Quebec Pension Plan (QPP): Quebec manages their own pension plan, at 10.05% and levied between $3,500 and $50,100 of income.
There are also additional pension plans managed by the government but only applying to a subset of the population, such as the Ontario Public Service Pension Plan.
Now that we have our definitions in place, this is what we have heard from Harper and the Conservative government:
- Minimum age for OAS benefits will be raised from 65 to 67 years old. This would put Canada in line with countries such as Germany, that have raised the minimum retirement age to 67 for those born after 1964.
- Those already retired or about to retire will not be affected.
- The changes proposed affect OAS only, and not the other programs.
- The reason behind this change is that the current $36 billion cost of OAS is expected to reach $108 billion by 2030. To put things in perspective, this would be like a cost of about $1 trillion for the US, though perhaps even more onerous because Canada’s per-capita GDP is lower.
- The government has so far refused to detail how the changes to OAS would take place, or if they will actually take place. A big political firestorm may cause the government to backtrack on this plan, or propose something different.