– The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies through research that is nonpartisan, evidence-based and subject to definitive expert review.
CANADA – With retirees living longer and the working-age population remaining relatively stable, the growing demand for financial support in retirement will potentially strain social security programs, according to a new report from the C.D. Howe Institute.
In “Greener Pastures: Resetting the Age of Eligibility for Social Security Based on Actuarial Science,” authors Robert L. Brown, and Shantel Aris, propose that raising the age of eligibility (AOE) for public pension benefits should be reconsidered in order to persuade more seniors to keep working.
“We know that because of low fertility rates, rising life expectancies and the aging of the baby boom, Canada’s old-age dependency ratio is rising. This will strain the sustainability of our social security systems and healthcare,” state the authors. “Other countries with aging populations are raising the AOE for social security benefits,” they add. These include Finland, Sweden, Norway, Poland and the United Kingdom.
The report was inspired by work done in the UK for the Institute and Faculty of Actuaries State Pension Age Working Party. Brown and Aris apply its methodology onto the Canadian context. The UK proposal is based on actuarial and demographic logic that would see a rise in the AOE to guarantee a constant proportion of one’s adult life is spent in retirement. Thus, as life expectancy rises, there is an upward shift in the AOE for social security.
“For Canadian demographics, that constant proportion is 34 percent,” states Brown. “Any lower value would result in an immediate need for a shift in the AOE, which we rejected,” adds Aris.
Using 34 percent triggers the first change in the AOE in 2025, which provides enough notice. The new AOE of 66 (phased in beginning in 2023 and achieved by 2025) would then be constant until 2048 when the AOE should shift to age 67 over two years.
Brown and Aris believe that this would help Canada to achieve five attractive goals with respect to its social security system:
- Increase the probability of its being sustainable;
- Increase the credibility of this sustainability with the Canadian public;
- Enhance intergenerational equity;
- Lower the overall costs of social security; and
- Create a nudge for workers to stay in the labour force for a little longer period.
One issue remains. Shifting the AOE upwards is regressive since wealthier Canadians live longer. However the authors argue that this can be mitigated by changing the clawback formulae now used in the Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
“The methodology borrowed from the UK should be embedded into the Canadian social security system (Canadian/Quebec Pension Plans, GIS and OAS) as an automatic balancing mechanism so as to put it beyond the vagaries of political winds,” conclude the authors.
