um anit o ba.

ca

http://umanito ba.ca/o utreach/evidencenetwo rk/archives/4505

Lies, damn lies and statistics

Old Age Securit y ref orm is wort h discussion, but wed bet t er base it in evidence f irst
A version of this commentary appeared in The Hill Times T he debate around raising the age of eligibility f or Old Age Security (OAS) has only just begun and already we are up to our necks in misleading inf ormation. Unf ortunately, some commentators have decided to use statistics the way a drunk uses a lamppostmore f or support than illumination. Recent examples f rom well-known and highly respected commentators (who should know better) have made some alarming claims. For example, that the percentage of the population collecting a pension will double over the next 20 years; or that the ratio of workers to retirees is headed to a 2 to 1 ratio; or that the OAS will triple in cost f rom $36 billion to $108-billion by 2030; and that theres an $800 billion underf unded liability in our Canada Pension Plan (CPP), along with the Quebec Pension Plan (QPP) While all of these statistics are accurate, they are so horribly out of context as to be useless or even harmf ul in pushing knowledge f orward. No wonder the public is alarmed. But lets look at the f acts. T he $800 billion unf unded liability in the C/QPP is based on evaluating these programs in the same manner as a private sector pension plan. T here is a $800 billion promise that is not pre-f unded, because, unlike General Motors or Air Canada, we do not expect the Canadian government to go into bankruptcy and close their doors at any time. T hus, it is f ar more accurate to evaluate the C/QPP on the assumptions that there will be f uture contributors and f uture contributions. When that is done, there is ef f ectively no unf unded liability in these systems. T his has been supported with every Actuarial Report of the CPP since its revision in 1996. T hese reports show clearly that the CPP is sustainable f or the next 75 years at the current 9.9% contribution rate. Similarly, the QPP is sustainable f or 75 years at a contribution rate of 10.8%. It is also true that the dollar, nominal, cost of OAS will rise f rom $36B today to $108B in 2030. But in that period of time, we expect the economy to grow. T he question is not how many dollars OAS will cost, it is whether or not that cost is sustainable. T here are many f eatures of the OAS program, including the Guaranteed Income Supplement (GIS), that limit the real rise in costs. OAS benef its are taxable income so many of the benef it dollars paid out go right back to Ottawa. Both OAS and GIS (WHAT IS GIS?) have claw backs which mean that wealthy Canadians get absolutely no benef its out of either program. Further, OAS benef its rise with the Consumer Price Index not wage growth. And it is f air to assume that the economy and wages will grow f aster than the cost of living. On that assumption, OAS costs which are 2.3% of GDP today will rise to 3.1% by 2030. And by 2050, as the baby boom dies of f , that cost will be 2.7% of GDP.

Is it sustainable? T hats f or others to decide, but we need to understand that the rise in OAS costs will require an additional 0.73% of GDP, not a tripling in the ef f ective cost as the rise f rom $36B to $108B given is meant to have you conclude. Finally, should Canadian workers have to work until age 67? Is that good public policy? Clearly, we need to do something about the rapidly rising dependency ratios as we head to the date where some projections indicate that if nothing is done there might only be two workers f or each retiree. But the reality is that the average Canadian worker today retires at age 62, not at age 65. T here is strong research that shows that if we could induce every worker to stay in the labour f orce until age 65 (65 not 67) that these dependency ratio issues would evaporate. So, working to age 67 is not necessary and may not be good public policy. Raising the average retirement age is good public policy and raising the eligibility age f or OAS is worthy of public debate. But, this debate should be based on relevant and meaningf ul f acts not misleading impressions. Robert L. Brown is an expert advisor with EvidenceNetwork.ca and a Fellow with the Canadian Institute of Actuaries. He was Professor of Actuarial Science at the University of Waterloo for 39 years and a past president of the Canadian Institute of Actuaries.