Editor’s note: This story ran before OAS eligibility was officially raised to 67.
Are you feeling a little uneasy about your retirement plans? We wouldn’t blame you. As Canadian Business went to press, it was widely expected that federal Finance Minister Jim Flaherty’s March 29 budget would include an announcement that the cutoff for Old Age Security (OAS) will be raised, which could compel millions of Canadians to delay their golden years. But even if nothing changes for now, there’s little reason to celebrate. Due to a whole host of factors—more to do with demographics, lifespans and lousy financial markets than balancing the federal budget—Canada’s retirement age is already rising.
You can’t say changes to OAS are unexpected: the government of Prime Minister Stephen Harper has been dropping broad hints for some time. During a speech at the World Economic Forum in Davos, Switzerland, in January, Harper cited the demographic changes threatening Canada’s retirement income system. “For those elements of the system that are not funded,” he warned, “we will make the changes necessary to ensure sustainability.” Others, including Flaherty and Human Resources Minister Diane Finley, soon elaborated that they were concerned about Old Age Security in particular. “It’s ticking along as if things haven’t changed demographically in 50 years,” Finley said in February. “Although there is no policy yet to announce, I expect that the upcoming Budget will ensure steps to protect retirement income.”
This change is important because OAS is the closest thing Canada has to a universal pension. For years, it has been available to citizens age 65 and older who have lived in Canada for long enough. It pays out up to $6,480 per person a year, which, for a typical Canadian couple can account for up to a quarter of total retirement income. The problem is that the cost burden will grow as more baby boomers retire. According to a 2006 study by the Office of the Chief Actuary, between 2003 and 2030 the number of Canadians receiving OAS will more than double.
Just how worried we should be about this is hotly disputed. Some say the system isn’t broken and doesn’t need fixing. In a report published in February, Parliamentary Budget Officer Kevin Page projects the cost of elderly benefits will increase from $36 billion today to a peak of $142 billion in 2036-37—but as dire as that fourfold increase may sound, that will amount to a relatively small portion of the nation’s economy (3.2% of GDP), and Page estimates that “the federal fiscal structure is sustainable.” Similarly, a 2010 study by OECD pension expert Edward Whitehouse found raising the eligibility age for OAS was not required. “There’s enough evidence that OAS is sustainable the way it is,” says social policy consultant Monica Townson, who writes extensively on retirement issues for the Canadian Centre for Policy Alternatives. “So one has to question why they’re doing this.”
On the other side are those who say that an older retirement age is inevitable. Finley has retorted that OAS is but one of many federal programs that will be ravaged by demographics. Others concur. OAS “will be one more handful of straw on the back of the camel that’s going to be carrying a much, much heavier load, mainly because of health-care spending,” says William Robson, CEO of the C.D. Howe Institute, a thinktank on the opposite end of the political spectrum from the CCPA. “The movement of the population to older ages creates all kinds of budgetary pressures. We’re going to be looking everywhere we can for ways to deal with them.”
It turns out, though, that raising the retirement age may not have much to do with balancing the books at all. Perhaps it just makes sense when Canadians are living longer and longer. As the number of years westerners spend in retirement increases, raising the retirement age is becoming such an obvious solution that most of Canada’s G7 peers have already done it. In fact, OAS aside, pressures are building from many quarters that will compel many Canadians to retire later for all sorts of reasons. “It’s virtually certain that younger Canadians are going to retire later than their parents, on average,” says actuary Malcolm Hamilton, a partner at Mercer who happens to be retiring this year at age 61. “This would happen even if there were no changes at all to any of the programs.” In fact, it’s already begun.
Placed in a historical context, the notion that everyone is entitled to a few decades of state-sponsored leisure, afternoon tennis and occasional Caribbean cruises is less assured than you might think. The first state-run pension plan, after all, appeared little more than a century ago.
In the last years of his reign, Prussian Chancellor Otto von Bismarck sought to stem the flow of German workers to America. Bismarck recognized workers’ lives were highly insecure: they could be reduced to poverty through illness, or unemployment brought on by economic change—or by age. The worker “foresees that he will one day be old and unfit to work,” Bismarck noted, “and society does not currently recognize any real obligation toward him beyond the usual help for the poor, even if he has been working all the time ever so faithfully and diligently.” In 1889, Bismarck introduced the Old Age Pension, an annuity paid to workers who reached age 70. Since the average Prussian died decades before that, Bismarck wasn’t exactly promising the moon.
Through this and other reforms, Bismarck laid the foundations for the modern welfare state, elements of which were adopted enthusiastically elsewhere. Canada introduced its first old-age pension in 1927, which paid British subjects up to $20 a month from age 70. (Adjusted for inflation, that’s about $260.) Canada’s current government-sponsored pensions are postwar creations. Introduced in 1951, OAS’s original qualifying age was also 70. The Canada Pension Plan, unveiled in 1965, provided a wage-related retirement pension beginning at age 65. This represented a subtle yet important change in thinking. By then, Canadians were living on average a few years past 65. The typical citizen could now expect to collect, albeit briefly.
Even those who live and breathe retirement issues often have difficulty explaining why this arbitrary age—65—became so entrenched in western retirement systems. “Sixty-five is a very strong marker,” says the C.D. Howe Institute’s Robson. Indeed, for decades collective agreements explicitly prohibited workers from staying on past that age. Many provincial programs for the elderly are also tethered to it.
Meanwhile, however, virtually everything else changed. Canadians began having fewer children. More of those children remained in school longer, therefore delaying their entry into the workforce. The economy became increasingly knowledge-based, creating more jobs that did not physically destroy workers’ bodies. Advances in health care greatly extended people’s lives. The result was dramatic: In 1960 the average Canadian lived to age 71; today, a typical Canadian gets about a decade extra.
All this created a lengthy life stage where none existed previously. By the 1980s, Canadians could conceivably enjoy more years in retirement than they did in the workforce. “Freedom 55,” the iconic insurance company marketing slogan, was a product of this era. We never quite achieved Freedom 55, though. Between 1976 and 2000, Canada’s average retirement age fell from 65 to an all-time low of 61.5, where it hovered for a decade.
Now it’s inching back up, and it’s tempting to regard the financial crisis as a turning point. Citing the havoc it wreaked on their investment portfolios, Canadians declared in survey after survey that they suddenly expected to retire later than previously envisioned. Official figures suggest they weren’t kidding. According to Statistics Canada, since 2009 the average retirement age has risen slowly but steadily, reaching 62.3 in 2011.
In truth, the reversal began earlier. Imagine two 60-year-olds, one who has decided to retire this year and the other who plans to work another decade. The 60-year-old who is retiring will affect the average retirement age this year, while the other’s decision won’t be recorded until 10 years later. That’s one reason why a recent Statistics Canada paper warned that average retirement age “does not reliably reflect changes in retirement behaviour.” Its authors point instead to another more telling indicator: the employment rate of people 55 and over, which has grown steadily since the 1990s. Notably, the employment rate of men aged 65 to 69 nearly doubled between 2000 and 2010, as did the rate for women aged 60 to 64. “Although the 2008 financial crisis and economic slowdown may have prompted some workers to postpone their retirement, delayed retirement is far from being a new trend,” they observed.
Canada’s retirement system is functioning well at the moment. According to the Organization for Economic Co-operation and Development (OECD), seniors in this country experience poverty at a rate that is about a quarter of that experienced by their American and Japanese counterparts. And mucking about with OAS historically proved politically costly. Prime Minister Brian Mulroney was the first to attempt it. His 1985-86 budget included plans to trim quarterly increases in OAS that compensate for inflation. This measure, which would have undermined the effective value of OAS payments by up to 3% a year, provoked outrage. A feisty pensioner, the then 63-year-old Solange Denis, accused Mulroney of betraying seniors. Mulroney backed down barely a week later. More than a decade later, then-Finance Minister Paul Martin’s own plans to reform OAS foundered.
Other countries, however, successfully raised their own benefit eligibility ages in response to similar demographic forces. Australia and Germany both laid out plans to raise their pension ages to 67; in Britain it’s already up to 68. The OECD reports that since 1999, normal pension ages among its member countries increased by more than two years.
Raising the effective retirement age alleviates the demographic squeeze in three ways. First, workers get extra years of relatively higher wages, allowing them to save more on their own. Second, the government gets to keep taxing them instead of paying them benefits. Third, the economy grows faster. “Encouraging people to work longer—through increases in pension age and reduced pension incentives to retire early—is a key objective,” the OECD enthused in a recent report.
The lesson from abroad is to announce any increases well in advance and roll them out gradually over long periods of time. Germany, for example, is phasing in its increase between now and 2029. Those nearing retirement are unaffected; the gamble is that younger citizens will be too busy watching reality TV to notice. “Slow and predictable changes in pension age justified by an increased number of years of healthy life at older ages, may be more politically acceptable than large, abrupt changes justified on the basis of budget stringency,” explained Austrian demographer Sergei Scherbov.
But raising the retirement age creates losers all the same. Townson warns that low-income earners and those with health complications will suffer as a result of deferred OAS. The risk is that some of them won’t be able to go on working: various research has shown that people in poor health, or people with family members in poor health, retire earlier than those more fortunate. Later retirement could conceivably hurt younger workers, too. If the elderly are persuaded to remain in the workforce longer, they might wind up competing with youth for jobs. (Older workers already appear to be displacing the young in retail, previously a youth stronghold.) The most common victims, perhaps, would be those who simply hate their jobs and long for escape.
Mercer’s Hamilton argues that whatever Canada chooses, it should not feel compelled to imitate European countries. “Having totally bungled the management of their retirement programs for three decades,” he says, “they’re now at the point where they have these unsustainable programs with very early, large pensions and no prospects for paying for any of them because they don’t have enough children.” Canada, by contrast, largely addressed its problems through CPP reforms in the late 1990s, and therefore has no cause to take such draconian measures today.
During the 1990s, predictions abounded that demographic change would eventually bankrupt the Canada Pension Plan, prompting some to advocate raising the qualification age from 65 to 67. Instead, the government raised pension contributions and introduced new incentives. Canadians can still collect CPP at 65, but if they hold off two years they’ll receive richer payments. The CPP reforms of the late 1990s are credited with putting that pension on a solid footing, and actuarial studies suggest it is sustainable in its current form for decades.
Prognosticators love the study of demographics because it offers rare variables that can be predicted with confidence. In a 1985 article, the Globe and Mail imagined Canada as it might be in 2010. The writer correctly predicted the world’s population would be near seven billion, and he was also right to anticipate increasing strain on the nation’s pension system. It’s perhaps comforting, though, to acknowledge demography’s limitations. The author was wrong in supposing Canada’s “Minister of National Crowd Control and Demonstration Dispersal” would need to dispatch the army to intercept illegal immigrants marching on Ottawa. And young people are not yet subscribing in droves to “the growing movement for euthanasia.” Remember that next time someone warns you seniors shall eat cat food.
That said, the recent trend toward later retirement ages seems likely to continue—even if government programs remain unaltered. Hamilton observes that, on average, younger Canadians stay in school longer than boomers did. They emerge with more student debt. They marry and have children later. Their mortgages have longer amortizations. “All of these things put them on a track where everything happens later,” he says. “If you’re still carrying a mortgage and paying for children into your mid-50s, you’re going to have a hard time setting aside enough money to retire at age 65, let alone 60.” Should low returns on bonds and stocks persist, that would only exacerbate this trend.
Opinion polls suggest Canadians are already abandoning dreams of early retirement. One recently published by Scotiabank found that 70% of respondents plan to work past 65. Another by HR consultancy Randstad Canada reported a smaller but still significant finding (52%). The surveys agree on something else, too: while many Canadians regard working longer as a matter of financial necessity, others look forward to it. Michael Adams, who has been surveying Canadians quarterly since 1976 at Toronto-based Environics Research, witnessed a seismic shift in attitude. “When we surveyed elders 20 years ago, about a quarter of them thought they might do remunerative work after reaching retirement age,” he says. “With boomers today, it’s well over 50%. They don’t want nine to five and rush-hour traffic. But there’s a sense that if they’ve got 20 years, they want to do something meaningful.”
This new world of later retirements is fraught with uncertainty, however. One question is whether the labour force will accommodate it. Francis Fong, an economist with TD, recently observed that businesses facing shortages of skilled labour are finding ways to retain or hire older workers, including expanding the flexible arrangements senior tend to prefer. But there’s no guarantee this demand will persist. During the 1980s and early 1990s, high public deficits and private-sector downsizings prompted employers to jettison older workers. Some believe the demographic bubble implies reduced aggregate demand and slower economic growth lies ahead. It’s difficult to predict how the labour market’s appetites will evolve.
Perhaps the most important question, though, is how long Canadians can be expected to work. In 2010, the International Institute for Applied Systems Analysis, based in Laxenburg, Austria, looked beyond simple chronological ages to examine how long people are enjoying good health. It concluded improving health goes a long way in offsetting the effects of an aging population. “If we apply new measures of aging that take into account increasing lifespans and declining disability rates, then many populations are aging slower compared to what is predicted using conventional measures based purely on chronological age,” argued Austrian demographer Sergei Scherbov. Scherbov’s insight is this: that if we stop assuming people are too old to live productive lives beyond age 65, the looming demographic challenge begins to look less daunting.
Hamilton, though, doesn’t buy it. The main reason for our extended lives, he argues, is that we’ve learned to treat medical conditions that used to kill us. “Some people seem to think if Canadians are living longer that means they’re staying young longer,” he says, “but most of that’s flat-out nonsense. People like me who are 61, our hair turns grey, our vision changes, our memory is not as good, we lose our hair. Things seem to happen much as they always did.” In other words, tomorrow’s 65-year-olds may be no more competitive in the workforce than yesterday’s. And that is a very discouraging thought. So save your money and conserve your strength. It looks like you’ll need both.