Article content

It’s an ill windbag that blows no good, as you might say, and Bloc Québécois Leader Yves-François Blanchet’s demand that the federal Liberals raise Old Age Security payments by 10 per cent for younger seniors (those aged 65-74) or lose his support in the Commons at least has people talking about OAS.

In FP Comment yesterday, economist Pierre-Carl Michaud suggested we give thought to folding OAS into the Canada and Quebec Pension Plans. OAS preceded CPP/QPP by 15 years, replacing the federal-provincial Old Age Pension ($240 a year for people who made less than $365 a year) established in 1927. (In today’s dollars those amounts are $4,296 and $6,533.50.) When OAS started, in 1952, it was $480 per year for anyone 70 years of age or older. (That’s $5,484.26 in $2024.) In 1952 under eight per cent of Canadians were over 65, let alone 70. Today more than 20 per cent are. The annual payment to people 65-74 is currently $8,732, though it’s phased out at a rate of 15 cents on the dollar starting at an income of about $91,000.

Article content

In the early 1950s, a 65-year-old man could expect to live another 10 to 12 years, a 65-year-old woman a little longer. (I’m eyeballing this off a StatCan chart so can’t be more precise.) Today that expectation is nearing 20 years, so you might think raising the age at which pensions kick in would make sense. The Harper Tories legislated an increase to 67 but the Trudeau Liberals, lathered in self-righteousness, cancelled it. (The OAS threshold had been reduced from 70 years to 65 in the late 1960s.)

Fifteen years after the OAS, we got the Canada and Quebec Pension Plans, which are contributory, operate by individual formula and make real investments with the premiums they collect — QPP from the start and CPP after some political arm-wrestling in the 1990s. Also in the 1960s, in Centennial Year to be exact, we got the Guaranteed Income Supplement, an income-tested payment for old folks at the bottom of the income ladder.

An obvious question, and one we probably wouldn’t be thinking about without the Bloc’s political brinksmanship (or actually BrinksTruck-manship, given its cost) is how these three systems — OAS, GIS and CPP/QPP either do or don’t work together in a sensible way.

Article content

Article content

And, at exactly the right time, along comes a new research paper by Kevin Milligan of the University of British Columbia and Tammy Schirle of Wilfrid Laurier University, published by the National Bureau of Economic Research in Cambridge, Mass., on this very subject.

It begins by reviewing some interesting facts. For instance, though inequality rose in Canada in the 1990s it has since been constant or even declining (which you wouldn’t realize listening to CBC). Seniors do relatively well in this country: people 70 and older who are 10 per cent from the bottom of the income distribution for that age group have higher incomes than equivalently-situated people aged 25-54 or 55-69. Poverty rates for seniors were higher than for other age groups up to 1980 or so, but have since been the same or, by some measures, lower (which suggests an OAS boost for people 65-74 may not be the best use of the several billion dollars it would cost).

But the real work of the Milligan-Schirle paper is to figure out the combined effect of OAS, GIS and CPP/QPP — the kind of calculation, when done as carefully as they do it, that is only possible with cheap computing power and lots of patience.

Article content

Our three-headed retirement-income system is potentially a Frankenstein. OAS is a flat payment that goes to just about everybody — though it’s phased out in the top tenth of the distribution. CPP/QPP depends on people’s work earnings so tends to go more to higher-income people — though both contributions and benefits have upper limits. And GIS is tightly focused on the bottom end. It might all balance out or it could be a big mess.

What Milligan and Schirle do is calculate people’s “social security wealth” at age 55. That’s the present value (using a discount rate of three per cent) of all future payments they can expect from the three programs combined. What they find is that “in Canada social security wealth is tipped toward lower earners.” To a certain extent, that’s surprising: on average, lower earners don’t live as long as those higher up the income ladder so don’t have as many years over which to accumulate benefits. On the other hand, benefits off in the future are discounted so don’t weigh as much on the wealth scale. The net effect is that people at the bottom end do get more.

Article content

The paper then tries to calculate the incentive effects of giving people this “social security wealth.” If I work an extra year, what does that do to my pension? (People do worry about such things: the last conversation I had about QPP rules was with a guy helping me load garden soil at a big box store.) Milligan and Schirle’s conclusion is that “fairly esoteric parameters like the actuarial adjustments and throw-out year provisions matter a lot for work incentives” and that the incentives themselves are consequential — with recent changes in CPP/QPP’s rules having tended to encourage rather than discourage work.

Merging OAS and CPP/QPP might make sense. But we need to calculate the incentives very carefully.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content