France is having a pension crisis. On Thursday, in advance of a decision from the country’s constitutional court, protesters piled mounds of garbage in front of the building. It’s the latest memorable visual from weeks of marches, protests and strikes that have swept the country since President Emmanuel Macron announced plans to raise the retirement age.
The United States is also having a pension crisis, though quietly and in slow motion. Republicans have long advocated averting calamity by cutting, gutting or privatizing the national pension plan known as Social Security; Democrats propose the opposite, namely higher benefits paid for by higher premiums. American politics being what it is, there’s been no agreement, so the Social Security continues to wend its gentle way toward the iceberg. The Congressional Budget Office says that unless premiums are raised, the deficit is increased or taxpayers kick in cash, pension benefits will have to shrink 23 per cent by 2033.
And Canada? Canada is not having a pension crisis. You may not have noticed. “Absence of Crisis Expected to Continue Indefinitely, Experts Say” is not a headline we tend to put on the front page.
But back in the 1990s, Canada was headed for a crisis. The Canada Pension Plan (and the parallel Quebec Pension Plan) had been created three decades earlier, and like most public pensions they were built on a pay-as-you-go model. CPP premiums deducted from workers’ paycheques paid retirees’ pensions, and once you retired, the next generation of workers would pay your pension. The CPP was a chain of intergenerational IOUs.
CPP and OAS: How the financial supports affect your retirement plans
That’s how the French public pension works, which is one of the reasons it’s in trouble. U.S. Social Security is the same story. With fewer births and longer lifespans, the ratio of workers to pensioners has been steadily falling. In 1960, 8 per cent of Canadians were seniors. By 2021, the figure was 19 per cent. In France, it’s 21 per cent.
An aging population doesn’t have to be a crisis. But choosing to do nothing in response – leaving pension premiums and pensions benefits unchanged, despite changing circumstances – is guaranteed to produce a crisis. It’s just arithmetic.
In the 1990s, then-Finance Minister Paul Martin and his provincial counterparts chose to face the arithmetic. They gradually doubled CPP premiums, to ensure that promised pensions would be paid, today and tomorrow. To make that possible, a large chunk of premiums now go into a savings account. The Canada Pension Plan Investment Board manages the growing pile, which at the start of this year stood at $536-billion. Your premiums today partly fund your retirement tomorrow.
The math adds up. According to the Office of the Superintendent of Financial Institutions’ chief actuary, expected pension payouts from the CPP are sustainable as far as the eye can see.
And a couple of decades after the Martin reforms, another federal finance minister – Bill Morneau – pushed through a modest increase in pension benefits, paid for by a modest rise in premiums. Canada has one of the least generous public pension systems; it was only designed to deliver a pension worth one-quarter of the average salary. The Morneau reforms will gradually raise that to one-third of the average salary, while also slightly increasing the maximum income – it’s $66,600 this year – subject to CPP premiums.
So is there any bad news in the Canadian picture? Yes. It’s Old Age Security. It’s a “pension” that nearly all seniors receive – 7.4-million of them this year. There are no premiums. All funds come from general tax revenues.
The chief actuary expects OAS spending to rise to $107.2-billion by 2030 from $69.5-billion in 2022. Part of that is driven by a rising number of seniors, and part is driven by real need: roughly a quarter of OAS spending goes to the Guaranteed Income Supplement, which keeps the poorest seniors out of poverty.
But some of the rising spending has to do with an inequitable vote-buying move from the Trudeau government. That’s layered on top of the long-standing inequity of giving OAS to wealthy retirees.
In 2021, the Liberals promised to increase OAS pensions by 10 per cent for people the age of 75 and older. The chief actuary says that, compared with previous estimates, OAS spending will be $4-billion a year higher by 2030. There’s no justification for this 10 per cent top up, other than that seniors vote, and governments like to get re-elected.
Then there’s the thing Ottawa has consistently failed to do: focus the OAS on low-income seniors. A couple with a combined income of $160,000 can still get a full OAS payment, with no clawback. Even couples earning up to $260,000 can get some OAS. Given that most of the taxpayers funding those cheques earn far less, and that in any case OAS is supposed to be an anti-poverty measure, it makes no sense.
A lower OAS clawback threshold plus an end to bonus payments for older seniors would save Ottawa a lot of money. Depending on where the line is drawn, we’re talking anywhere from billions of dollars a year to tens of billions of dollars. That would free up resources for higher priority areas: health care, child care, and higher GIS payments for the poorest seniors.