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Sep 22, 2009

A Bold Proposal to Renew Confidence in our Retirement Income System

September 22, 2009

Mowat Centre features editorial by Tom Kent discussing alternatives for Old Age Security and the retirement income system in Canada.

Last winter, governments and central banks rediscovered John Maynard Keynes and saved us from a depression like that of the 1930s. Even so, restoring employment will be slow. And the great financial meltdown of 2008 has left other troubles. Among the worst is shattered confidence in retirement incomes.

But correcting it is complicated by the imminent shrinking of the work force, as there are fewer young Canadians to enter it. A contemporary pension policy, therefore, calls for the marriage of two objectives: restoring confidence in retirement incomes and, at the same time, making people less eager for them, because later retirement is rewarded with a gratifyingly larger pension.

There is a way to serve both purposes. Old Age Security is universal for people with incomes below or a little above average, and phases out gradually for those who are better off. It applies, in short, to the people who most need protection from the uncertainties of the market economy. But, alone, it is small and always paid at 65. It should be significantly increased for people who have retired, or retire in future, at that age, and be increased a good deal more for people who go on working.

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The specifics of this reform would require wide consultation and careful calculation, perhaps phasing. The following figures illustrate the idea.

OAS is now a little over $6,000 a year beginning at 65. Raising it to $10,000 would help significantly to rebuild confidence. A substantial incentive to delay retirement would be a $100 increase for each month after your 65th birthday that you continue working. Delaying to 70 would thus result in an OAS of $16,000 a year. If you lived to 90, you would receive a total of $320,000 over the years, compared with $250,000 if you had begun at 65. (This is, of course, the comparison in current dollars. The actual amounts would be indexed as now.)

There is another way to bigger pensions. It is to raise the regular contribution rate, and consequent benefit level, of the CPP/QPP. This has the political merit of not calling for more of everyone’s taxes. It exploits the surviving feeling that people are fortunate if they have a pension plan to contribute to. In fact, compulsory contributions are a tax, avoidable only if you don’t work or can hide your earnings. Like all payroll taxes, they discourage regular employment and foster an underground economy. The benefits are correspondingly discriminatory. By their nature, contributory pensions cannot work for everyone.

Those were the reasons why the CPP/QPP was established on a modest scale, as one of two components of the public pension structure that I participated in building in the 1960s. The other was OAS, which had previously been paid only from 70. An enhanced benefit was moved to 65. That was sound public policy then. Now, with an aging population, we need to move the other way.

As yet, however, no improvement in public pensions is on the political agenda. Instead, the government is increasing its subsidization of private pensions. That contributions to them are tax free is the minor part of the subsidy. The major part is the privilege that distinguishes money in them from other investments. Year after year, it compounds, with all its dividends, interest and capital gains, tax free.

The only beneficiaries from the next increase will be people able to save $27,000 annually (and thereby cut their income tax by more than $10,000). At a 4-per-cent rate of return, they’ll need only 23 working years to build the retirement nest egg of a millionaire.

Such distortion of public finance is an outrage from politicians who mouth sentiments about equality of opportunity. The subsidization of private pensions should not be increased but cut to a fraction of its current level, with the tax savings put to fair encouragement of productive work.

However it’s done, improved pensions will be paid for by some kind of taxation on people not yet retired. Reform of OAS is the straightforward way. A politician both honest and articulate would not be afraid to champion that this is the fair way for Canadians to enjoy better retirement incomes without letting their aging weaken the productivity of their economy.

An earlier version of this article appeared in the Globe & Mail.


Tom Kent

Release Date

September 22, 2009


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