Old Age Security Reform is Needed

Unless you have been ignoring the media for that last few days you are likely aware of the buzz going around the media about the federal government plan to reform the Old Age Security (OAS) program.  While the details of the reform is outstanding the current thinking is they will likely go with an increase the age requirement from 65 to 67, but in reality they have other options too like increasing the claw back provisions.

First a little history, what is Old Age Security?  Well despite being called a pension, it really isn’t one at all.  First off there is no money saved for this program despite being around since 1952.  It is paid for entirely out of the General Revenue Fund by the federal government in the current year.  Thus our 2010 tax dollars paid out our 2010 OAS benefits that year.  The programs needs an overhaul…badly.  How so?  Well there are a few interesting facts like the taxpayer to retiree ratio is currently 4 taxpayers to 1 retiree, which will decline to 2 taxpayers to 1 retiree by 2030.  Add in the program is expected to cost $108 billion by 2030 up from $36.5 billion in 2010.  So if you have three times the cost and half that taxpayers that means you need to increase taxes or cut service by six times  today’s payments just to fund this program.    I don’t know about you, but I’m not prepared to pay that much more tax just to keep the status quo.

The other thing people tend to forget is what is the program supposed to do?  While some people do think of it as a pension plan I personally tend to think of it as a social safety net.  It provides a basic income to seniors while some additional funds for low income people with the GIS or Allowance programs.

So what will changing the age requirement for OAS do?  It delays the problem some what and reduces a little bit of the cost, but if you really want to have significant cost savings the government is going to have to do more.  So what is a likely target, in my mind, if you want to be fair about it you start by increasing the claw back provisions.  This way the basic function of the program can stay in place while we take the extra money out the hands of retirees that need it the least.  By the way, the claw back starts when your income hits about $67,600 and by  about $109,000 you have to pay all of it back.   I don’t know about you, but if your making over $75,000 a year in retirement, I don’t really think you need the OAS.

So how would you deal with this huge cost increase to the OAS program?  Raise the age, increase the claw back or something else?  For US readers, the problem is similar for the Social Security program, so feel free to rant or make suggestions.

12 thoughts on “Old Age Security Reform is Needed”

  1. I don’t understand why the clawback threshold (lower limit) is increased each year. I have long thought that if the threshold were held constant, the OAS liability would fall each year (proportional to inflation), finally becoming close to worthless for all but the lowest income seniors. And because none of our seniors should live in poverty, I think that would be an acceptable solution, far better than changing the amount of the benefit.

  2. As a young Canadian, I was pretty surprised to find out (a few years ago) that such programs exist. Why should the government supplement my income in retirement if I wasn’t smart enough to save for it?

    There are a large number of people my age who would be considered ‘fiscally conservative and socially liberal’ (whichever politician figures this out and starts a party based on it is going to be a genius!). So, I support the conservative reform of this program. I also agree with Robert that seniors should not live in poverty.

    Considering the clawbacks START at $67,600 (I’m kind of floored by this…), I would support significantly lowering this amount, to the neighborhood of $40,000 (still not below the poverty line) and cutting it entirely for any income above $60,000 or $70,000. If you’re able to make this much off of your own retirement funds or pensions, there is NO WAY you need additional help from the government.

    There’s an entitlement issue here that needs addressing, but I’ll save that for now.

  3. Brian sign me up for your political party.

    I also agree that the claw back could be started at a lower income level. If you factor in your spouse’s earnings, a retired couple could bring in $135,200 a year and still get full OAS. You would need to have investments worth $2,000,000 bringing in 6.75% to reach that mark (if you aren’t on a pension plan). Plus, we all forget that income from a TFSA is not taxable and could also be omitted.

  4. @Brian,

    I total agree with your statement “There’s an entitlement issue here that needs addressing, but I’ll save that for now.” You don’t have to wait to address that…I don’t mind long comments. People have paid into the current system for years and feel they should get something out of it, but fail to realize that nothing has been saved…there is nothing to be entitled to!

    As to your political party idea, you could just take over the Green party…they run on a one vote per person system so you could just get enough people to join with your views and you could run the country fairly quickly. I would vote for a party like that.

    Tim

  5. @Canadian Dream,

    I’m more thinking of entitlement in the sense that people seem to believe the government will look after their well being in retirement, regardless of what they save prior to entering retirement. As I state above “Why should the government supplement my income in retirement if I wasn’t smart enough to save for it?”

    Beyond providing basic support to those seniors who TRULY need the assistance (earning less than the $40,000 clawback thresh hold I suggest), it doesn’t seem right that we should continue to support a program that is unsustainable and has no plan to be funded beyond the general operating budget (horrible financial management in my opinion – I didn’t know this prior to reading the article).

    @Ross,
    I’m surprised a party like this hasn’t formed yet. I don’t have aspirations of running the country as Tim suggests, but would support the movement!

  6. @Canadian Dream,
    I am interested to understand how you think we should handle the public workers DB pension liabilities… is this not also looking at some serious shortfalls?

    I don’t know about you, but I’m not prepared to pay more tax to pay public pension liabilities.

    for AOS, i agree with Robert.

  7. @my2cents4free,

    DB pensions – ah, that is a loaded question. The obvious first step is to drop the DB pension for all new hires and contain the liability. Then it starts to get messy since you really don’t want to cut pensions for those who are already collecting. So you have to be very careful on how to do it. I would personally suggest the easiest way is adjust the formula. Most DB plans are similar with a 70% replacement of the best five years of salary. In reality they could be fine with 50% of their total average salary, yet it would be unfair to drop that on people almost at retirement. So you would have to consider a phase in approach and perhaps also drop the inflation adjustment on those under the old formula. In any case, you would have to have some buy in from the plan membership to some degree. People tend to think they own that money, but fail to realize that it can only be paid if the government has the cash. A Nortel situation can happen to government pensions (unlikely yes), but people tend to ignore that.

  8. I totally agree with your suggestions on DB pensions! And I agree your view that OAS should only be a safety net, and the clawback should increase substantially. Nobody in our country should live in poverty, but then our government should have the financial IQ to spend our money wisely and responsibly. (disclosure: I am still over a dozen years away from being eligible to collect OAS.)

  9. Speaking of OAS and pensions has anyone seen the deal our MP’s are getting? Taxpayers match 23x their contributions and their Investments are guaranteed 10%+ returns annually. Works out to a million dollars for a single 4 year term. If the government wants to take money from seniors they could maybe take a cut first.

  10. I think while it may be okay to be a senior today, there’s going to be a rude awakening for a lot of people in about 15-20 years. That rude awakening has to be gradually put in place today. I think the facts show that people will NOT be able to fully retire at 65, even on a reduced income. The majority of people 65+ will HAVE to work over the age of 65.

    My fear is that those of us who *have* saved will be penalized somehow. I’m not sure how it will be done but it seems to be the case that:
    (a) we don’t want seniors to live in poverty
    (b) most people don’t save enough on their own to not be living in near-poverty
    (c) this could be a generation away since our parents did save and will bail the current baby boomer generation out, anyone born after or without savvy, frugal parents is S.O.L.

    I think they should start raising the CPP rate ASAP. IIRC, it’s been very stable for many years. By the time people wake up to the state of their finances in their 60’s, they’re too old to really make up any kind of shortfall.

    Look at these tables:
    http://www.servicecanada.gc.ca/eng/isp/statistics/cppstatbook/statbook2011.shtml
    More was paid out in OAS than CPP. That just seems crazy. Let’s face it. People CAN’T budget for themselves. The general populace DOESN’T plan ahead. We have to move to more of a system where the government takes on the role of babysitter for these people for their own good. I’m all for it if they start taking 10% (the minimum we should all be saving) right off the top in the form of CPP. People will adjust.

    I believe in free agency as much as the next person, but it’s naive and unrealistic for the majority of people.

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