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There's a snag about this reasoning, Frances. Sure, it's politically easy for Cameron and Harper to raise pension ages in the distant future, but that's only because they haven't actually raised them yet. These "savings" are purely imaginary today. It is the politicians of the future who will bear the political cost of pension cuts because they are the ones who will actually have to carry out the pious wishes expressed by Cameron and Harper today. The logical conclusion: there is a substantial probability that these changes will never occur. So we are back to the question of not when, but if.

It was going to happen. Look, I had five great-grandparents when I was born (you read that correctly), included two sets of spouses and all four of my grandparents. People are living longer today. The question is who gets the mortality credit. In the case of OAS, it is the government.

BTW for non-Canadian readers OAS it not a funded plan, it is paid for out of current general revenues and always has been.

Since it's a non-funded plan the government should get the mortality credit.

BTW as I said this blog gets to keep its Maple Leaf. ;)

Frances,

I suspect it'll be even more gradual than than. Doing it in 6 month increments will create politically visible discontinuities (i.e., if you turn 65 on December 31 you can retire that day, if you turn 65 on January 1, you have to wait 6 months to retire). Far more likely is that we'll see the retirement date increased in 2 month increments every year until 2024.

What will be politically tricky is the group that Kevin identified, i.e., those who retire at 65 (or earlier) because they are simply not able to work anymore. If the Tories are clever, they'll use some of their savings to provide funding for that group.

Phil,

They'll bake the increases into the legislation so it happens automatically. People get upset about change, but once you make it the law, there won't be much political pressure to undo that change. The Americans have been doing this for years (albeit even more slowly). Since 2003, it's gone up from 65 to 66, and it'll be 67 in 1925. Social security may be the third rail of US politics, but not one says boo about about the increasing retirement age. Truth be told, politically, no one noticed.

Hi Frances,

Interesting post. I think a reasonable policy for a higher OAS age can be constructed if a) it is done smoothly and slowly and b) there is some change to support older people who can't work at older ages. (b) is a difficult thing to do, but there is some hardship there that ought to be considered.

Phil: the question is whether or not a future government can costly say "this was planned years ago, you should have protested back then when you had a chance, if we change things now the world is going to end." My thinking is that they can do so, at least at minimal cost - though, as you rightly point out, it's entirely possible that I'm totally wrong on this.

Determinant: True, it was paid for out of current general revenues, but those revenues were earmarked for that purpose (as my father reminds me every time the subject of OAS repayment comes up). See this brief history of pensions in Canada:

"Old Age Security pensions would be financed through a small (two per cent) increase in personal income and corporate taxes and the earmarking of a portion (again, two per cent) of manufacturers' sales taxes for this purpose."

Kevin: "there is some change to support older people who can't work at older ages"

And people who can't find work, too - relative to other OECD countries, Canada spends relatively little on income support for the "working aged" and a lot on the 65+ group. B.t.w., liked your elephant-and-mouse piece in ELab very much.

I wonder if, in parallel to the increase in the OAS/GIS age, we might also see an adjustment to the age at which people have to convert their RRSPs to RRIFs as well as the schedule for collapsing their RRIFs.

From a purely policy perspective, the same consideration that motivate the change to the OAS/GIS age (people are living longer) would seem to apply equally to the RRIF age (people are living longer, so they should collapse their RRIFs at a later time or at a slower rate). It also discourages people from working past 71 (not everyone is eager to hang up their spurs - though lord knows why). The current RRIF schedule no longer reflects people's life expectancies. Moreover, I wouldn't think the revenue cost would be huge. There'd be an impact on timing, and maybe some lost revenue from better income smoothing (i.e., people don't get pushed up into a higher tax bracket - but that works both ways, if people die with larger RRIFs, it would likely get taxed in a higher tax bracket, so the income averaging effect in ambiguous).

Politically, having to collapse/draw down RRIFs seems to be something that drives seniors nuts and seems to drive a fair bit of financial planning amongst the over 65 set. Changing the RRIF regime would be a relatively low cost means of reducing one irritant to offset the increased age for OAS/GIS (and a change that would be consistent the governments broader policy aims - i.e., changing the retirement system to reflect demographic realities, and encouraging people to work longer/save more).

So you want to set the RRIF age at 73?

Fine. I'm of the opinion that if you depend on a RRIF for a substantial part of your retirement income you should purchase a life annuity for the truly essential part of your budget.

Anytime Moshe Milevsky says "longevity insurance" read "life annuity", a product that has only been around for a few centuries. Sorry, Dr. Milevsky gave what is perhaps the least original piece of personal finance economics analysis ever seen in Canada.

Bob - interesting point. Certainly there is a huge amount of political pressure to ease the RRIF rules, and linking a rise in the pension age to a relaxing of RRIF rules would definitely reduce the amount of opposition to the scheme.

Sorry for the jumble of metaphors ... Sure, pick the low hanging fruit, but if it's undersized and not ripe, then why bother? So now we will all sit around congratulating ourselves on our fiscal prudence while assiduously ignoring the health care elephant in the room and demanding another GST cut.

Yay for us.


Health Care has an easy solution. Make Shangwen Minister of Health.

Patrick - My guess is that those born in 1959 will start needing more amounts of health care in 2034, and great wads of it by 2044 (using the basic rule that "young old" - 65 to 75 - are generally pretty vigorous and healthy - but people start using more care when they hit "middle old" age and step up with the health care usage again at "old old" age i.e. 85.

So - figuring that things break when the tidal wave hits - expect gradual change and tinkering to health for the next 20 years or so, and radical restructuring to be in place for 2034.

Determinant: ;-).

Whether OAS or any other means of financing is used, what reallly count is the ratio retirees to workers. You can pretend to have PAYGO and tax or pretend to fully fund and let the market work the whole thing out.
Less savers and more drawdowns means lower security prices for the retirees while the employers of the young face higher borrowing costs. Meaning there is less room for wages but less workers means higher wages. It wontt be pretty, but in the end less workers means less consumption. All is left is to shoot the wounded. As I say to my students when I explain pension: dont ever come near my breathing machine. I wll be loaded and locked and will take the nearest one with me...;-

older people working longer will raise unemployment for the young...

rjs - "older people working longer will raise unemployment for the young..."

I don't know. I think about the labour market more in terms of good jobs and bad jobs - good jobs being secure, well-paid, etc., bad jobs being minimum wage, insecure, etc.

Young people generally don't have too many problems getting bad jobs - wouldn't you rather have your coffee prepared by a young and energetic worker? So it's not so much the unemployment factor.

It's more that older people working longer will keep the young out of the good jobs - which is why we need nepotism ;-)

Determinant: to be fair to Dr. Milevski, while annuities have been around for a long time, it is more recently studied why they are so much less popular that they ought to be if people were rational. I think he is doing good work in terms of increasing the mind-share of annuities in the general public.

It seems to me that, as has been pointed out in the US debate over Social Security, that those that depend on it for a significant part of their retirement income are lower down the socioeconomic ladder, and that we should consider life expectancy changes for those groups when considering whether to raise the eligibility age. I probably won't depend so much on OAS (and maybe should be means tested out of it). But, my life expectancy has probably increased more (based on my socioeconomic factors) than those that depend on it. It would be perverse for me to argue that this important social program shouldn't be available to those that need it because my life expectancy has increased.

Right now most advanced economies can borrow at very, very low real interest rates. In so cases negative. And the boomers are set to start liquidating houses and risky assets to buy safe assets (like gov't bonds), from which they will ONLY spend the interest while their consumption tanks. And now we think it's a good idea to the oldsters more incentives to demand more safe assets, while gov'ts do their damnedest to create ever fewer safe assets.

Maybe I'm missing something, but this doesn't seem likely to end well. If anything, shouldn't we be increasing the income guarantees for the oldsters in a bid to find ways to either get them to spend down their savings (or pass them on to people who will spend sooner rather than later?

whitfit: "It would be perverse for me to argue that this important social program shouldn't be available to those that need it because my life expectancy has increased."

That's a really excellent point. Back in the 1990s there was an attempt to create a new Senior's tax benefit, parallel to the Child tax benefit, which would have concentrated income support on the most needy seniors. It was a total and utter political disaster.

What is just and what sells politically are sometimes quite different things.

Patrick: "If anything, shouldn't we be increasing the income guarantees for the oldsters in a bid to find ways to either get them to spend down their savings"

I think I need to do another post for the G&M on the psychological problems with RRSPs as a way of saving for retirement. I don't think that there's anything that you can do that will make people feel even vaguely comfortable about spending down their savings. I wish I could find some more research on the psychology of this - but perhaps it's nothing more complicated than a form of loss aversion.

As Bob Smith and others noted earlier, if an increase in the OAS age is tied to changes in the RRSP/RRIF rules, it might get wide-spread support. From precisely the unneedy folks whitfit is talking about.

Patrick, how do you do that without making it a further transfer of wealth to the boomers from their children? The boomers can suck society dry, with their kids working in indentured servitude until they finally die, but I don't see how this benefits their kids.

It seems to me that you could address the needs of the people who can't work by providing an exception to the increased eligibility age for people who are eligible to collect CPP disability payments (or who would be eligible for those payments if they were under 65), perhaps with a slower phase-out (i.e., gradually pull up the threshold at a slower rate for people in those groups). That's the sort of compromise that would take some of the political sting out of the change and target some of the groups who whitfit is concerned about, without undoing the overall cost savings.

That said, the life expectancy numbers at birth are not dramatically different by income (at least between the top and botom quintile - if you drilled down by decile, you'd probably see a bigger difference), for men it's about a 5 year difference between the top and bottom quintile (80 vs. 75) for woman it's about a 2.5 year difference (81.5 vs. 84). And by the time the government actually pushes the retirement age up to 67 (i.e., sometime in the mid 2020s, it's expected that life expectancy will have increased by a few more years. Also note, those numbers are life expectancy at birth, the income gap narrows significantly if you look at life expectancy at 65 (part of the reason the poor have shorter life expectancies is that they're more likely to die young - obviously those early deaths don't affect the life-expectancy of the over 65 set).

For what it's worth, whitfit, poverty is also closely correlated with all sorts of life-shortening (and voluntary) behaviours which somewhat taints the equality case against the proposed changes. Smoking being a key example (I still remember the center for policy alternatives paper which damned the Liberals for making the tax system more regressive by increasing cigarette taxes). At least in the US, lung cancer and other smoking related diseases explains a big chunk of the difference in life expectancy of the rich and the poor). Obviously, that doesn't undo your entire argument (not all poor people are smokers), but it does put a different spin on it (i.e., if your life expectancy is shorter because you smoked a pack a day, you're not going to get much sympathy from the complaint that you don't benefit from OAS).

Bob: "poverty is also closely correlated with all sorts of life-shortening (and voluntary) behaviours which somewhat taints the equality case against the proposed changes."

Those voluntary life-prolonging behaviours require a certain basic material and social infrastructure that people living in poverty might lack. Walk to work? Not so easy without a warm coat and good shoes - or if you live miles away from work because that's the only place you can afford to buy accommodation. Buy beans in bulk, cook from scratch, to make healthy, delicious, low fat curries and chilis? It takes time, equipment, knowledge, recipes. A bag of potato chips, on the other hand, is a cheap and easy way of achieving a few minutes of pure bliss.

The disability portion of CPP is actually a fairly big driver of CPP costs; I wouldn't expect to see any policy moves that would make claiming CPP disability more attractive to people.

Frances, I get the gist of what your saying, if you were talking about living in crappy houses or near polluting factories, where poverty may well link to lousy health outcome (although it doesn't take away from my point). I would not have chosen that food example, since the inability to cook healthy meals from scratch can be addressed by anyone inclined to do so (what kind of equipment do you need for chili, a pot? a hotplate? maybe a spoon? the recipe off the back of a bag of beans?). People, rich and poor, the world over find time to cook their own meals (and have since the first cavewoman applied flame to food). There's no excuse for not doing so (and certainly pursuit of bliss is not a better excuse for eating crappy food than it is for smoking, doing crack, etc.).

Back to your point, query whether there would be anyclai additional incentive to m CPP disability. Certainly there wouldn't be any additional incentive to apply before age 65 (since if you don't do it now, nothing would change under my proposed regime before you turn 65). You get can retirement benefits when you turn 65, so there's no added cost there. On the other hand, since you have to stop working to claim CPP disability, there's some significant risk for people who try to claim CPP disability gratuitously, particularly given that OAS isn't all that generous (i.e., the population for whom it makes sense to quit work at age 64 or ealier and forego a year or more worth of income in order to MAYBE collect 6K a year from OAS when they're 65 and 66 isn't likely to huge - particularly once you factor in the cost and effort involved in applying for CPP disability payments). For the most part, you'd expect the only people for whom it would make sense to qualify for the transitional OAS rules would be those people who already qualify for CPP disability payments.

Bob - a person laid off from a tough, physically demanding manual job probably has enough back/knee/other problems to make a good case for CPP disability eligibility, and CPP disability is fairly attractive relative to minimum wage work, provincial social assistance, or employment insurance.

Must go now, I'm off to make dinner, which is going to consist of split pea and lentil soup, followed by cabbage, egg and rice stir-fry...

If the issue is disability then the tool to address it is disability insurance. The Disability Income Insurance market is very well-developed in Canada. As Canadian group benefits insurers (the big life insurers primarily plus provincial Blue Cross plans) cannot provide basic medical coverage due to the public plan and their clients don't have to pay for public coverage through private premiums, the dollars that in the United States which go into basic medical coverage go into Disability Insurance coverage in Canada.

I worked in a call centre for $12/hour and still had DI coverage. Canadian group providers will not sell a plan in most market segments without DI coverage.

Consumer education about Disability needs is a little understood need but it would go a long, long way to helping people. Taking out a personal policy with a two-year waiting period with regular occupation coverage (the good kind) is not expensive and does much to secure a person's income.

Blue Cross plans have a mandate to provide supplementary coverage to provincial public plans and Ontario/Quebec Blue Cross (they are the same organization) has moved heavily into this segment.

You can even get short-term policies to cover waiting periods.

We have the (private sector) tools to solve this problem, we just need to use them. This is not as difficult as it looks.

"a person laid off from a tough, physically demanding manual job probably has enough back/knee/other problems to make a good case for CPP disability eligibility, and CPP disability is fairly attractive relative to minimum wage work, provincial social assistance, or employment insurance."

That may well be the case, although note, those people don't collect CPP disability before 65 now , so the question is, would the availability of OAS for people age 65 to 67 likely to induce people to apply (successfully) for CPP disability benefits before age 65? Ultimately it's an empirical question, but the answer isn't self-evidently "yes". (And I think EI is more generous than you give it credit for - the maximum payment is significantly larger than the maximum CPP benefit, albeit with a shorter duration.)

Dinner sounds good - I'll be having baked macaroni and cauliflower.



Bob - "would the availability of OAS for people age 65 to 67 likely to induce people to apply (successfully) for CPP disability benefits before age 65"

As you say, it's an empirical question, and there have been some papers published on this back when people were starting to get really worried about CPP disability costs.

Actually I don't think CPP disability is an issue here because CPP can be claimed from age 60 at a reduced rate.

Andrew F: Fair question. I have no idea.

I can't believe I've been the most pro-market poster on this thread.

I shall have to lie down and watch the latest NDP debate to recover.

Frances,

On further thought, they'll have to do something about CPP Disability one way or another since, as it's currently structured, it ends at 65 (on the theory that, at that point, you can collect ordinary CPP, OAS, GIS, etc.). So either they'll have to extent CPP disability to 67 anyhow, or permit people who can collect it to collect OAS/GIS at 65. One way or another, that group will have to be addressed.

Good piece in the Globe today.

Bob - thanks! The G&M piece definitely benefited from all of the feedback I got here, especially the point about the likelihood of changes in the RRSP/RRIF rules (which the government will keep silent about, and then unveil as the big budget surprise - that's how they do things). So thank you.

Speaking of pensions and my comments about Assuris, we now have a working example of failing gracefully in the life insurance/annuity industry.

Union of Canada Life has failed and has been ordered to be liquidated by the Ontario Superior Court of Justice. Assuris' protection has automatically kicked in and the agency is working with the liquidator to move policies to a solvent insurer. Nobody will lose more than 15% of their benefits.

http://www.assuris.ca/Client/Assuris/Assuris_LP4W_LND_WebStation.nsf/page/Policyholders+Darksite!OpenDocument&audience=policyholder

This is a sterling example of how pensioners/annuitants SHOULD be treated in case of bankruptcy. Not how Nortel treated its pensioners.

I suspect Mr. Harper may be being machiavellian with his proposal to raise OAS age limit. His real target is not the OAS, which probably does need to be raised, given increased life expactancies and demographics, but is generous public sector pensions. If the general population needs to take a hit on their relatively small public pension, then he's going to have a strong negotiating position with the public sector unions. Employees in the private sector without a pension will be looking forward to their OAS, even if it is quite small. They'll be rather annoyed if they have to wait for two extra years to get OAS, while public sector employees continue to claim full defined benefit pensions at age 65 or lower.

Sinjin - great to see you on the blog!

I've been figuring there has to be something in the next budget that will sweeten the OAS hit. I'd guessed an easing of the RRSP/RRIF rules, but your idea is intriguing.

Pausible, too.

By the way, Sinj, are you psychic? I just got a press release from Bill Tufts, author of Fair Pensions for All, saying "it would be all right to raise the OAS pension age as long as the public sector pension age rises too."

Sorry, this has less traction than you think it does, Frances. The Federal government controls relatively little in the way of public-sector pensions. The really big pensions are at the provincial level: teachers, municipal workers, hospital workers, even university staff. Yes, this means you.

Ottawa has a say over federal crown corporations of which by far the biggest is Canada Post.

The Public Service Pension Plan/Superannuation Plan, the one for direct Federal public servants who are employed by the Treasury Board has a vesting period of five years (return of personal contributions only before then) rather than two which is standard in Ontario and an accrual period of 35 years (2%/year, maxes out at 70%). The Public Service Pension Plan is in good financial shape too, regardless of the CD Howe's institute propaganda to the contrary.

Second, the federal Public Service doesn't bargain over wages nor over pensions. The Feds have never bargained over items which impose a financial burden on the Crown, those have to be approved by Parliament. PS Pensions are governed by the Public Service Superannuation Act, not by contract.

Third, federal PS pensions are integrated with CPP for both contributions and benefits. Thus if you retire with a final salary of $56,000 then the PS Pension only pays 45% of your income, the rest comes from CPP.

Fourth, trimming federal PS pensions doesn't have much political impact. 40% of the Public Service of Canada is based in Ottawa. The other 60% is spread all over Canada. Outside Ottawa the Federal Government has a small presence in most places, it's insignificant compared to the provinces and municipalities. Nobody will notice the difference.

Lastly, please disregard anything the C.D. Howe institute says about federal pensions. They are flat wrong. MP's do not get a full pension after 5 years, they VEST after five years. They don't get full salary, they get 5 years of average earnings multiplied by the pension accrual percentage which is 3.3%. So an MP gets 16.5% of pay after five years of service and only receives it after age 55. The maximum pensionable amount is 70% so you have to serve 21 years to get a full pension.

Now this is a very good plan, but you do not, under any circumstances, get a full pension after 5 years. The C.D. Howe' Chair's statement otherwise is false and if knowingly false is a libel and slander. He really should watch what he says.

Help! Help! Another brilliant and somewhat lengthy thought of mine has got caught in the spam filter!

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