PREPARED BY ALLAN MOSCOVITCHFOR THE COUNCIL ON AGING

OTTAWA, MARCH 2012

THE CANADIAN PENSION SYSTEM AND ITS REFORM

THE PENSION SYSTEM

• In retirement, people rely on a combination of• Public pensions• OAS and GIS Minimum Income Programs – Tax revenues• C/QPP – Social Insurance – Premiums paid by employees and

employers• Social assistance

• Registered Pension Plans• Other private pensions • Personal savings – including RRSPs, RRIFs, TFSA,

Investments, Insurance, housing• Employment income• Support from family members

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PUBLIC PENSIONS

• The Public Pension System• Old Age Security• Guaranteed Income Supplement• Canada and Quebec Pension Plans• Social assistance

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THE OLD AGE SECURITY (OAS)

• $540.12 per month or • $6481.44 per year• Received by 4,764,820 Canadians in 2010-2011• Available to everyone who has lived in Canada for

40 years since the age of 18• The OAS is indexed to inflation• The OAS is taxable income

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OAS CLAW BACK

• The OAS is subject to a clawback at $69,562 for 2012• For every dollar ($1.00) of income above the

threshold, the amount of the OAS pension reduces by 15 cents•  All OAS is clawed back at $112,772 in 2012

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GROWTH IN OAS BENEFICIARIES

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HTTP://WWW.SERVICECANADA.GC.CA/ENG/ISP/STATISTICS/CPPSTATBOOK/STATBOOK2011.SHTML#T3

HOW MUCH ARE WE SPENDING ON THE OAS?(IN BILLIONS)

HTTP://WWW.SERVICECANADA.GC.CA/ENG/ISP/STATISTICS/CPPSTATBOOK/STATBOOK2011.SHTML#T3

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PERSONS IN ELDERLY FAMILIES LIM MEASURE AFTER TAX, 1977-2009

8

0

4

8

12

16

20

24

28

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Date

Geography: CanadaLow income line: Low income measure after taxStatistics: Percentage of persons in low incomeEconomic family:     Persons in elderly families

Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual

% PERSONS IN ELDERLY FAMILIES BELOW LICO, AFTER TAX, ANNUAL DOLLARS, 1992

BASE, 1977-2009

9

0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Date

Geography: CanadaLow income line: Low income cut-offs after tax, 1992 base

Statistics: Percentage of persons in low incomeEconomic family:     Persons in elderly families

Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual

% ELDERLY FEMALES BELOW LIM MEASURE AFTER TAX

10

0

8

16

24

32

40

48

56

64

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Date

Geography: CanadaLow income line: Low income measure after taxStatistics: Percentage of persons in low income

Economic family:     Elderly females

Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual

% ELDERLY FEMALES BELOW LICO, AFTER TAX, ANNUAL DOLLARS, 1992

BASE, 1977-2007

11

0

9

18

27

36

45

54

63

72

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Date

Geography: CanadaLow income line: Low income cut-offs after tax, 1992 base

Statistics: Percentage of persons in low incomeEconomic family:     Elderly females

Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual

AFTER TAX POVERTY RATE FOR SENIORS, 1976-2007

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AFTER TAX POVERTY RATES BY AGE

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ARE WE DOING SOMETHING RIGHT?

• The data suggest that public policy is having a strong impact leading to the reduction in poverty rates for people over the age of 65• The combination of the OAS, the GIS, the C/QPP

and the tax system have brought down the poverty rates• There is still more to be done, in bringing down

the rates of poverty for single elderly women. • Increasing the age of eligibility for the OAS will

not improve the economic conditions of many people who depend on it particularly those with low incomes

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THE REFORM OF OAS

• It is the upward trend of numbers of beneficiaries as the baby boomers retire, and• The increasing expenditure on the OAS that have

been the subject of attention recently from conservative policy analysts and Conservative politicians• An additional concern - seniors (people aged 65

and over) represented 8% of the population in 1971, 14% in 2011 and are likely to represent almost 25% by 2036.

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PROJECTED PENSION COSTS TO 2035

• Historical and Projected Provincial/Territorial Health Expenditures and CPP/OAS Expenditures (Including GIS and Administration Costs), as a Share of GDP

• Sources: For health care data – Office of the Parliamentary Budget Officer, Fiscal Sustainability Report, 18 February 2010, and authors’ calculations; for CPP/OAS data – Office of the Superintendent of Financial Institutions, Actuarial Report on the Canada Pension Plan, 2010, and Actuarial Report on the Old Age Security Program, 2008. Some Public Policy Implications of an Aging Population Havi Echenberg, James Gauthier, André Léonard, Library of Parliament, http://www.parl.gc.ca/Content/LOP/ResearchPublications/CurrentEmergingIssues-e.pdf 16

REFORM POSSIBILITIES

• A major issue for the Conservatives is wanting to make government smaller. The reduction in the GST was intended to push in this direction.

• The recent expansion of government expenditures was forced on them by a minority parliament.

• Doing nothing is an effective option since the OAS is not broken – its helping to reduce senior poverty

• With increasing GDP, while expenditures on the OAS increase, they will not increase substantially as a % of government revenues unless governments decide to reduce taxation

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TOTAL TAX REVENUES AS A PERCENTAGE OF GDP, 2003 OECD FACT BOOK 2006 - ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS

PUBLIC SOCIAL EXPENDITURE AS A PERCENTAGE OF GDP, 2001

OECD FACTBOOK 2006 - ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS

REFORM POSSIBILITIES

• The Conservatives have talked about the OAS as a burden on the federal government. They have floated the idea of increasing the age of eligibility of the OAS from 65 to 67.

• Were this implemented it would have to be phased in so that it does not affect anyone currently retired or planning to retire in the next 10 years.

• But an increase in the age of eligibility will have the effect of depriving low and moderate income seniors of significant income for two years.

• What are the implications?

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REFORM POSSIBILITIES

• The result is likely to be some combination of:• An increase in measured poverty among seniors• More seniors in the labour force longer if they can which

means fewer jobs for people attempting to either enter or move to better paid positions

• More emphasis on savings for those who can save and avoid the impact especially through the government’s new tax free savings plans

• Use of the TFSAs will means less income tax revenues • Lower incomes is directly related to poorer health

outcomes which may cost more than the savings

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SOME OTHER CONSIDERATIONS

• Seniors pay taxes including on the OAS that they receive.• A very small percentage of seniors are subject to the clawback indicating a

need for public pensions• In general Canada does not spend a high percentage of GDP on social

programs

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WHAT IS THE PURPOSE OF OAS REFORM?

• Reduce OAS expenditures because the OAS is unaffordable – not clear that it is unaffordable.• Reduce government expenditures – this may be a

Conservative goal but is it the consensus of Canadians?• Require more people to depend on their own

resources instead of government – a Conservative goal but for many people it is unrealistic – they do not have the resources.• Reduce the deficit and debt – could seek new

forms of taxation as the economy recovers-

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THE BENEFITS OF THE OAS

• Helps keeps large numbers of the population out of poverty (in combination with the GIS)• Puts income in the hands of people who spend it

which keeps the economy moving.• Sends a message to most Canadians that in

retirement there are still some forms of social solidarity that almost everyone can benefit from and depend on

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REFORM ALTERNATIVES

• Are there alternatives for governments determined to reduce OAS expenditures?• Hold or reduce the level at which the clawback

begins to an amount less than $69,562.• Increase the clawback rate on a progressive

basis ie 15% to 20% at $79,000 to 25% at $89,000, and then 30% on the rest so that it takes a little more faster.• Neither of these changes would have the same

impact on low and moderate income seniors as an increase in the age of eligibility would

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REFORM ALTERNATIVES

• Monica Townson writing for the CCPA earlier this year, points to the fact that income from a TFSA is not counted in establishing eligibility for the GIS.

http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2012/02/OAS.pdf

• This is likely to have the effect of increasing eligibility for the GIS

• She is pointing to the way that the income tax has been used by successive governments to provide benefits especially to higher income earners

• It may be desirable to increase the eligibility for the GIS to people with incomes just above the previous limits

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REFORM ALTERNATIVES

• But another choice is to alter the range of tax based benefits used to support private pensions.• For example the net tax benefit (taxes lost) due

to the RRSP in 2010 was $12.125 billion per year, much of which goes to individuals and households with high incomes.• The tax expenditure for 2010 for RPPs was

$16.790 billion• CPP premium deductibility is worth another

$8.240 billion to employers and employees

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REFORM ALTERNATIVES

• Lastly, here’s an idea in the other direction. • First establish a modest income security tax as a

percentage of gross income. • Second, use the revenues to create a pension

fund to support continuing the OAS into the future. • Third, as the fund expands, with rising incomes,

use the additional funds to increase the OAS.

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THANK YOU FOR LISTENING AND PARTICIPATING

The End

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