Last week in Davos, Switzerland, Prime Minister Stephen Harper spoke to the world’s elite business crowd to lay out a startling potential cutback in Canada’s Old Age Security Benefit.
One would have thought that the federal election campaign held ten months ago would have been the place to broach such a matter, but that would have cost him votes and likely prevented Conservatives from obtaining their long sought for majority.
Canada’s OAS benefit is a fundamental feature of our country’s retirement system. Providing on average about a $500 per month benefit at age 65, it represents for many retirees a significant portion of their post-retirement income. Delaying entitlement to this benefit, to age 67, will negate plans for retirement at 65 or sooner for many Canadians. Both the economics and the politics behind this move are important to consider.
In fiscal terms, demographics dictate that OAS costs will rise in the next two decades. What today is $38 billion expenditure will exceed $100 billion by 2030. Expressed as a share of the economy, OAS expenditures will move from 2.43 per cent of GDP in 2012 to 3.16 per cent in 2030, and then back down to 2.35 per cent by 2060. This amounts to less than a one per cent increase in the short term and is in fact a stable cost over the long term.
As a country, we can plan to provide this expected benefit or not. By announcing that we cannot afford the status quo, Harper has made a clear choice to tell future retirees they can do without the $12,000 they would otherwise receive and wait to access OAS when they are 67. For most it will mean working until they turn 67. His choice is for corporate tax cuts and the interests of the wealthy over the majority of Canadians.
The other choice would be to announce that this cornerstone of Canada’s retirement security system will not be altered, but real steps will be taken to fix the most pressing retirement issue our country faces. Many Canadians are working their way to a retirement without a system to save within to provide for themselves when they reach retirement.
The other obvious option for Harper’s Conservative government would be to admit to Canadians, that in today’s sluggish economy, now is not the time for either personal or corporate tax cuts, and his government will not purposely shrink revenues at a time when paying bills is in question.
The Conservatives are well aware of the fact that almost two-thirds of Canadians do not have a workplace sponsored savings system. They also know that private sector employers are moving away from sponsoring adequate private pension schemes. I suspect they know that the country’s RRSP system has failed in that seven in ten Canadians don’t participate in it. And they know that their so-called Pooled Registered Pension Plan - a system where employee enrollment is automatic but employer participation is not - is doomed to fail.
A gradual expansion of the Canada Pension Plan, whereby workers and employers increase their premiums to fund a doubling of the CPP / QPP to where in today’s terms a maximum benefit of around $20,000 could be achieved, is the retirement security leadership the country needs. These increased premiums would be affordable for Canadian workers and employers, and would ultimately bring down the cost of OAS.
This type of leadership won’t come from Harper for a couple of key reasons.
Harper does not believe in this collective commitment to Canadians, he accepts advice from some employers who term expanded CPP as a payroll tax, one they don’t want to pay. He also would be in for tremendous pressure from Canada’s banking and insurance industries, who like very much charging the highest management fees in the G-7 to manage private savings vehicles.
Harper’s strategy is to shrink the size of government and tell us what we can’t afford. By doing so, he avoids tackling the real retirement insecurity issue facing the country, and imposes a concession on the workforce of today, many of whom will not be able to work in their current occupations past age 65.
I thought the arrogance of the majority that befalls many governments might take longer to take hold with Harper. I was wrong, as is he with the trial balloon he floated in Switzerland.