Is The OAS/GIS Program Unaffordable?

February 3, 2012

2-minute read

No. Of course not. Even if the government waves around scary large increases in nominal dollar terms.

As has been widely reported, the most recent OAS actuarial report shows that total program expenditures will rise from $38.8 billion in 2011 to $107.9 billion in 2030. However, the dollar figure reflects, not just an increase in the number of OAS beneficiaries (from 4.9 million to 9.3 million), but also inflation. And the economy will grow over the same period.

As a share of GDP, the program cost is forecast to increase from 2.36% in 2011, to a peak of 3.14% in 2030, after which year the cost will fall. In other words, the cost of the program as a share of national income will increase by 33% from 2011 to 2030, even though the number of seniors will increase by 90% over that period. Growth of costs is slowed by the fact that benefits are indexed to inflation rather than to average wages, which are soon expected to rise at a faster pace than has been the case over the past twenty years and more.

Despite claims that OAS costs will be “unaffordable,” [sic] the Parliamentary Budget Officer has just reported that the federal government’s fiscal position is - admittedly following the new cap down the road on the Canada Health Transfer - sustainable in the context of an ageing society. In fact, they project that the federal government is now on track to eliminate the federal debt and to start running a surplus, all in the context of an aging society. The size of the underlying surplus is put at 0.4% of GDP.

It also has to be borne in mind that OAS (but not GIS) benefits are taxable, so the federal government recoups a significant share of what is paid out. In most cases, even GIS recipients will pay some modest income tax on their OAS income.  The amount of OAS recouped by the federal government through income taxes can be estimated to be about 20%. And, of course, retirees pay consumption and other taxes as well.

(OAS benefits are also clawed back above a high income threshold, currently $69,562, and OAS benefits are completely taxed back above an individual income of $112,772. But this recovery applies to only 6% of OAS beneficiaries, and just 2.3% lose all of the benefit.)

Revenues from income tax on OAS may increase moving forward as a rising proportion of relatively affluent seniors have earnings from employment. The labour force participation rate of persons aged 65 to 70 more than doubled from 11.4% to 23.9% between 2000 and 2011. This is partly due to inadequate pensions and retirement savings, but also to the fact that some persons over age 65 want to work and are able to do so.

Statistics Canada recently reported that, while life expectancy has been rising, the average number of years spent not working  has been stable since the mid 1990s due to the fact that more and more seniors are staying in the workforce longer.

It can be noted that the widely touted option of raising the age of eligibility from 65 to 67 would not, in and of itself, save a lot of money. Average life expectancy at age 65 is 20 years (18.3 years for men and 21.5 years for women) meaning that the average new OAS beneficiary will receive benefits for twenty years.  Raising the eligibility age from 65 to 67 would reduce the cost by 10%, and by even less if life expectancy continues to rise.

The CLC proposal to phase in an increase in CPP benefits, supported by many pension experts and by most provinces, would reduce GIS benefits down the road.  While an expanded CPP would take forty years to fully mature, it would still have a significant impact when we hit the peak retirement years of the baby boomers, the majority of whom are still in their early 50s.

 

 

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