Tuesday, April 10, 2012

OAS Age Change Debate

To say that some people are unhappy that eligibility for Old Age security (OAS) will be going up from age 65 to 67 is an understatement. Preet Banerjee collected together some of the more reasoned arguments in this debate. I don’t want to pick on Preet because he’s definitely one of the good guys, but I don’t agree with everything he said.

My main concern is with the oft-quoted statistic that OAS and GIS (Guaranteed Income Supplement) payments are currently 2.36% of GDP and are expected to rise to 3.14% of GDP by 2030. Preet says that some see this as a “whopping” increase, it doesn’t really look very whopping at all.

I disagree. GDP (Gross Domestic Product) is the market value of everything produced in the entire country. Just about anything you measure as a percent of GDP (except government debt) is going to look small. Even Bernie Madoff’s fraud was only 0.45% of U.S. yearly GDP. If my cable company tried to convince me to take a full suite of all their top-of-the-line services because it only costs 3% of my pay, I wouldn’t be persuaded.

I definitely agree with Preet when he looks at the main reason in favour of increasing OAS eligibility: “If we did nothing, the average length of retirement would eventually approach the average length of one’s working career.” OAS needs to change over time to reflect changes in our longevity.

Preet asked a final question in reference to the fact that we can defer OAS payments past age 67 in return for higher payments: “As voluntary deferrals earn a premium in benefits, can those of us who got the shaft at least get a premium for our mandatory deferral?” My answer would be that younger people already get a premium in the form of a greater life expectancy which leads to more OAS payments.

I’d like to see automatic OAS reviews that would make eligibility adjustments based on life expectancy. The goal would be to make the lifetime costs per person for OAS stay constant (after adjusting for inflation). Without automating these changes, inaction causes OAS costs to keep rising as life expectancy increases.


  1. From the hysterics we're hearing from the old people lobby, you'd think the government had announced that we were going to start making them into soylent green.

    Speaking as a member of the generation that's being saddled with the boomer's debt, the only thing wrong with the increase in OAS age is that it's not being done today.

  2. You don't want to pick on me, yet you pick on me. What are you, a politician all of a sudden? :)

    I appreciate your comments as always.

    While my Globe and Mail columns are limited in terms of space allotted and I don't get to say everything I would like, you make an excellent point that just by living longer one would collect more benefit.

    And while perhaps the increase in costs relative to GDP could be considered whopping, regardless, that increase should only be temporary. If there is an increase in OAS payments relative to GDP based on demographics, then presumably the decrease in education costs would partially offset that anyway. But this is making a big assumption that nothing is going to change between now and then and just projecting tax rates, credits, and current relative budgets forward in time.

    After the boomer cohort has come and gone, the cost relative to GDP should go back down. So, raising the age based on sustainability is a permanent solution to a temporary problem - again, if sustainability is the issue.

    I do think making the change upwards in age is fine for other reasons, but I've also said elsewhere that if they are going to make changes, I'd like to see an analysis of the effect of reducing the clawback threshold. Currently, clawback doesn't begin until one's income is about $70K.

    I'm not sure why we need to pay welfare to those who don't need it.

    See you in a few weeks!

  3. @Matt: Nice soylent green reference. I agree that it would be better to make the age change immediately, but that would be political suicide.

    @Preet: I agree with you that most of the OAS increase is temporary, but it will rise again when the echo generation hits retirement. The baby boomers make the problem look worse than it is. However, a fraction of the increase is permanent due to rising life expectancy. I'd like to see the OAS age be periodically reset to some fixed percentage of life expectancy (like 85%) and then each generation can debate what level of payments make sense. As for clawback, I wouldn't be opposed to reducing the income at which clawback begins, but I feel much more strongly that we can't have people thinking that it is their right to be taken care of by young workers during a ridiculously long retirement.

  4. Switching to a fixed percentage of life expectancy makes sense. It would hopefully avoid having to constantly revisit the same issue (at least the age part).