Third Time's a Charm for Cutbacks to Pensions?
Prime Minister Stephen Harper’s Conservatives, emboldened by the power of a majority government, are poised to launch daring cutbacks to public pensions that could spark inter-generational tension among Canadians.
With Finance Minister Jim Flaherty set to reveal the details in his budget next Thursday, the outlines of what likely lies ahead are becoming plain:
• The backbone of the pension system — Old Age Security (OAS) —will be slashed for future seniors, likely by extending the age of eligibility to 67 from 65. The purpose is twofold: Keep Canadians in the workforce longer to boost the economy and provide taxes to government and; limit the costs of the OAS system by ensuring there are fewer beneficiaries. The big question Canadians will learn in the budget: When do the cutbacks start — expectations are it won’t be for another decade — and how gradually are they to be implemented?
• The pension plan for members of Parliament — long criticized as “gold-plated” because of its generous benefits — will be scaled back. This will provide political cover for the governing Tories during the expected OAS public controversy so that they can claim they are also making personal sacrifices. The key question will be whether the changes amount to tinkering — MPs must now serve six years to qualify, and they can start drawing benefits at age 55 — or if the plan is blown up and turned into a private pension scheme that costs the taxpayers significantly less.
• The pension plan for public servants also may be ripe for change. A recent report by the C.D. Howe Institute concluded that if public-sector pension plans used market yields to calculate their liabilities, Ottawa’s unfunded liability would be $227 billion. The government began dropping hints this winter that it is reviewing the pension scheme to ensure it is fair to both employees and “taxpayers” — prompting speculation that Flaherty will announce that public servants will see their contribution rates, set for 40 per cent in 2013, ultimately rise to 50 per cent.
Get ready for the Great Pension Debate of 2012
Ipsos Reid pollster Darrell Bricker says Canadians could be on the verge of rising up in anger at the government because they have not been “conditioned” to accept the need for OAS cutbacks.
“The government hasn’t found their message or their voice in this debate yet. It’s the one that could really blow up.”
Results of a recent Ipsos Reid poll found more that 68 per cent of Canadians oppose increasing the retirement age to 67 from 65.Political analysts have a phrase for such issues. It’s the “third rail” of politics. Just as a subway system has an electrified third rail that no one should touch, issues occasionally emerge that no politician dares even brush by.
This year, in Canada, it could be pension cutbacks.
“It’s pretty close to the third rail,” says Bricker. “You’re feeling the current through your foot.”
Others have tried it — Brian Mulroney in 1985 and Jean Chretien in 1996 — and stepped back once they saw the grey wave of protest about to drown them.
Mulroney had proposed to partially de-index OAS but backed off after a little old lady — Solange Denis — confronted him on Parliament Hill, wagging her finger and complaining that he had broken an election promise.
“You lied to us,” she said. “You made us vote for you, then goodbye Charlie Brown.”
A decade later, Paul Martin, then the Liberal finance minister, announced plans to replace the OAS with a new “Seniors Benefit” that would affect future pensioners.
Under the Liberals’ proposed change, low-income seniors would have received higher benefits than under OAS, while those with a higher income would either get reduced pensions or no benefits at all. The overall costs of the system would have been slashed by about 10 per cent within 35 years. Chretien grew wary of the public backlash and the plan was left to wither and die.
But Harper has publicly staked his own reputation as an economic manager on his plan — declaring at a summit in the Swiss Alps two months ago that Canada’s aging population has become a backdrop for his concern about how to keep the country strong over the long term.
“If not addressed promptly, this has the capacity to undermine Canada’s economic position and, for that matter, that of all western nations well beyond the current economic crises,” said Harper.
In a later interview with Postmedia News, Harper was emphatic.
“We are going to have a lower and lower percentage of our population that is working. This is going to be a significant economic problem. And obviously, one of the things that many countries have been looking at is trying to have the incentives to keep people in the labour force and contributing.”
And so, the cost of Canada’s pension system will be cut.
Today’s seniors will be left untouched. But many others — possibly anyone under the age of about 50 — will receive a stark message: The public pension plan now in place for seniors won’t be so generous by the time you hit 65.
Experts say that could leave middle-aged, and younger, taxpayers furious that their generation is being shortchanged.
Ken Battle, president of the Caledon Institute of Social Policy, says the issue could become a political headache for the Tories.
“Any time you try to screw around with old age security it can be dangerous, no matter what you say.”
The government says the cost of the OAS, without reforms, will soar to $108 billion in 2030 from $36.5 billion in 2010. But critics and experts say that, in fact, when viewed as a ratio of Canada’s GDP, the increase in pension costs won’t be so stark.
“The key is that the pension system is sustainable,” says NDP critic Wayne Marston. “There is not a crisis.”
Battle also says the cutbacks are not necessary — and he urges the government, if it is determined to proceed, to offset the changes by measures to ensure poor seniors, aged 65 and 66, still receive benefits.
As well, he suggests a new “variable” eligibility formula that would allow people to collect their OAS benefits at different times — say as early as 60 and as late as 70. Those who collect their benefits earlier would receive a smaller payment; those who put it off until later in life would be rewarded with a higher benefit.
Battle says if the government merely extends the OAS eligibility to 67, the result will be a “regressive” shift that hurts poor seniors the most. He says seniors aged 65 and 66 will end up on provincial welfare rolls or would try to survive on low-wage jobs.
“Paying welfare to near seniors is hardly an admirable social security system. It really is unfair.”
Battle makes a good points on the regressive nature of these measures. Poor seniors struggling to get by should receive OAS. But some of these reforms are necessary. I've already written that when it comes to pensions, Canadians are whiners. We need to accept that we're living longer and by consequence we're going to have to work longer.
As far as Ottawa MPs, their snouts have been in the pension trough for far too long. On top of getting generous benefits, their pension plan dips directly into public coffers every quarter, effectively shielding it from market dislocations. Sweet deal, makes you wonder why all Canadians don't have such gold plated pensions.
The most contentious cuts will be on public sector pensions. Here is where the government has it all wrong. The market yields the C.D. Howe Institute uses to calculate their liabilities are too low. By contrast, the rosy investment projections U.S. pension funds use to calculate their liabilities are too high. I think we got it right in Canada and do not need to scare monger people into believing our unfunded pension liabilities are much higher than they truly are.
What reforms do we need in the public sector? We need to raise the age of retirement and just make sure the contribution rates are high enough to fund these plans. We also need to implement reforms on governance and make all public pension plans a lot more transparent and accountable. I'm a stickler on that issue because I've seen and know too much. Every large pension fund in Canada has skeletons it wants to bury. Every single one of them.
But the most pressing reforms won't be in the budget. These include expanding the CPP and providing better universal coverage by bolstering defined-benefit plans for every Canadian, not just MPs and public sector workers. While Quebec is pressing forward with its version of PRPPs, the truth is Harper's Conservatives should stop banking on PRPPs, roll up their sleeves and do what's right for the country. And if the banks and insurance companies had any sense of vision, they would be pushing them to do exactly just that.
Pensions are going to be widely contested in the next election and with good reason. As more and more Canadians retire, they're legitimately worried about living their golden years in peace and security. Instead of addressing their concerns, provincial and federal governments have largely ignored them and come up with half-baked measures that will only accelerate pension poverty.
Below, CTV reports on changes to Canadian pensions. Listen to what one older lady says about working past 65 and what a political scientist says about who will be most hurt by these changes.