Canadian premier Stephen Harper may have felt that the best way to introduce bad news to Canada’s pensioners was to travel three and a half thousand miles away to the World Economic Forum in Davos so that he could avoid the resulting flack, but there is no doubt that all of Canada heard about the speech almost immediately. Already the battle lines are being drawn in what promises to be a major political war over the pension issue.
To be fair, Canada’s pension system is in good shape, at least in comparison to most of the G20. The fact that the Canadian Pension Plan is fully funded gives the Ottawa government a far sounder base to build on than most western governments.
But the Harper government is clearly aware of the need for change. Over the next 20 years, the cost of the Old Age Security benefit (OAS) is going to rise from $36.5 billion to $108 billion. This is going to happen as dependency ratio is set to drop from 4.6 to under 3 over the same period, meaning that there will be fewer workers to tax in order to pay out the OAS.
Clearly, something must be done to solve this looming problem. However, this is the point at which the Conservatives’ innovation appears to have run out. Having made a great start to pension reform with the introduction of Pooled Registered Pension Plan, they now have retreated to the standard approach of most western governments, which is to raise the age at which pensions can be claimed, in this case from 65 to 67.
Endlessly this is waved before us as a solution, despite the high and increasing levels of unemployment across the G20 nations. If the number at work does not increase, then delaying the exit for pensioners simply delays the entry for school and university leavers.
While younger people may be less of a burden on the state, although that’s open to question, it still doesn’t resolve the problem of controlling the demand on government revenues.
Also, HLE (Healthy Life Expectancy) is actually increasing at a far slower rate than life expectancy itself, which means that businesses, particularly those requiring manual labour, could end up reducing productivity at the very time we need to raise productivity in order to produce more with a smaller workforce.
The danger with this approach is that it seems to be doing something to address the problem, while it actually fails to achieve anything. And while we wait, we lose precious time to seriously think about how to fund a society based on a population spread that is completely different from anything that any previous generation have ever had to face.
The government should consider stepping back to consider how raising productivity could help to deal with the pension crisis, allowing more dependents to be supported by less people. It has been estimated that just increasing growth by 0.5% over the next two decades would avoid the need for any tax increases to support Canada’s OAS benefit. Alternatively, we could look at how the shrinking labour force can be expanded by increasing immigration in order to achieve the same aim.
We can expect the debate on this to be carried on a very high decibel level over the next six months. It would be nice to think that having achieved so much in the pensions arena, Canada could lead the way by coming up with a more innovative and lasting solution to the ageing population issue rather than just forcing older and sicker employees to remain in the workforce at the expense of the next generation.