May 4, 2012

Budget Axe Falls on Retirement Supports

Feds continue burden-shifting onto the 99 per cent

by Alex Hemingway

The Dominion - http://www.dominionpaper.ca

The federal government is arguing that cuts to Old Age Security cuts are necessary to stem “unsustainable” program expenditures, but critics say the case presented for the cuts is deeply flawed and misleading. Photo: Melissa McCabe

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VANCOUVER—The federal government recently raised the age threshold for Old Age Security benefits from 65 to 67. This new age requirement will come into effect in 2023. The Harper government says that the OAS in its current form is an untenable strain on resources as Canada’s population ages. But, as critics point out, the fiscal case presented for the cuts has been deeply flawed and misleading.

The federal government argues that the OAS cuts are necessary to stem “unsustainable” program expenditures that are rising from $39 billion in 2011 to $108 billion in 2030 (and Canadians are left to simply imagine how quickly costs will rise in later years).

The government's projections, however, do not adjust for inflation or economic growth. They were stated in nominal rather than proportional terms, creating a “sticker shock” effect. Put in more meaningful numbers, the cost of OAS will rise by 2.4 per cent to 3.2 per cent of the GDP between 2011 and 2030.

The government case also omits that these cost increases are projected to peak in 2031, then plateau and ultimately reverse, falling back to 2.4 per cent of GDP by 2060 (according to the government’s own actuarial report on OAS).

Pensions and Occupy come together in a England during a public sector strike march in Aldgate, Central London. November, 2011. Photo: Nick Hider

The more sober assessment of the OAS situation is supported by the non-partisan Parliamentary Budget Officer, Kevin Page, who said that the program was already on sustainable long-term fiscal footing, “even under the baseline assumption that there is some additional enrichment to elderly benefit payments.”

Even evaluated on the grounds of the modest budget savings they appear to offer, the OAS cuts are problematic.

The lost income resulting from the OAS cuts is substantial for individuals. The exact amount varies depending on the year of retirement. For example, a person who is 35 years old today stands to lose a total of $24,451 as a result of the changes.

“Canada’s public pensions are already too meager. And I fear, if they are raising the age, that it won’t be long before we see further cuts in these inadequate pensions,” said Gudrun Langolf, first vice president of B.C.’s Council of Senior Citizens’ Organizations.

Cuts to retirement income will push more seniors into low-income status, and degrade the quality of life of others, particularly at a time when employment-based pensions are increasingly scarce and also facing cuts.

Workplace pensions are rapidly being converted into “defined-contribution” plans. These plans offer weaker income security, largely because they channel retirement savings into individual investment accounts that are vulnerable to the short-term fluctuations of the market.

The burden of the OAS cuts, as is all too often the case, will be borne disproportionately by low-income seniors, as well workers in what the Canadian Centre for Policy Alternatives calls physically demanding or stressful occupations (for whom delayed retirement is especially burdensome).

As Michael Wolfson, the former Assistant Chief Statistician at Statistics Canada, has noted, the costs will also inevitably be carried by taxpayers through provincial governments, which will have to fill the income gap left by OAS cuts from their welfare budgets and through other forms of social assistance. Since OAS benefits are taxable, any potential fiscal savings from the cuts will be further offset by a drop in federal and provincial income tax revenue.

Some Canadians will manage to sock away more money in private retirement savings programs such as RRSPs, but ownership of these plans is already highly skewed towards the top of the income distribution. Participation rates in private retirement savings plans in 2008 were 86 per cent for the top fifth of income earners and 9 per cent for the bottom fifth, according to Statistics Canada.

Private retirement savings programs also carry far higher administrative costs than public pensions, reducing the overall efficiency of the retirement system, even while increasing income inequality in retirement.

The OAS particulars aside, Canadians might also ask why their future incomes must be targeted for belt tightening, while corporate tax rates continue to fall (to 15 per cent federally this year, down from 28 per cent in 2000). This is to say nothing of billions spent on the war in Afghanistan, over $600 million planned spending on building new prison cells, and an estimated $25 billion on new fighter jets.

Perhaps unsurprising in this context, the Organisation for Economic Cooperation and Development has taken particular note of Canada’s growing inequality, which has seen the incomes of the top 0.1 per cent more than double over the past 30 years, while their tax rates have fallen precipitously (and median Canadian wages have stagnated).

Cuts to OAS appear to be just one more turn of the vice-grip that places the burden of government austerity measures onto the backs of those who can least afford it. What remains to be seen is how communities and citizens will respond to this set of policies in an era of majority government and renewed activism in Canada.

Alex Hemingway is a Vancouver-based educator and PhD student in Political Science at UBC. He received master's degrees in Global Politics and Social Policy at the London School of Economics.

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