In New York today, Prime Minister Justin Trudeau announced that the upcoming federal budget will cancel the current plan to increase the age of eligibility for Old Age Security (OAS) from 65 to 67. Kyboshing the plan, with a phased-in increase from 2023 to 2029, is a bad move.
    
For starters, it means the cost of OAS and related programs will grow, consuming a larger share of federal resources in the future. Increased OAS spending means less spending elsewhere, higher taxes, and/or more government borrowing.

OAS costs will increase as seniors (ages 65 and over) continue to enjoy longer and healthier lives. Living longer and healthier lives is no doubt something to celebrate, but it also means seniors are receiving OAS benefits for longer periods, driving up the program’s costs. That’s why governments around the world have taken steps to reform public pensions by increasing their ages of eligibility. Trudeau’s move would make Canada an outlier.

Since being established in the 1960s, the age of eligibility for OAS benefits has decreased, while life expectancy has gone the other direction. If the age of eligibility for OAS had been indexed to life expectancy in 1966, Canadians would start receiving OAS benefits at the age of 74.

Paradoxically, Trudeau’s own finance minister has written about the economic benefits of delaying retirement to age 66 or 67. In Bill Morneau’s co-authored book, The Real Retirement, he argues later retirement would increase the size of the workforce, and benefit seniors by keeping them active and giving them more time to save for retirement in an age of longer lifespans. In fact, the book notes that in the years ahead, “various incentives, government policies, and employment practices to encourage early retirement will make little sense.”

Nonetheless, as the population continues to age, a larger share of Canadians will receive OAS benefits relative to working age Canadians. Critically, however, there is no dedicated fund to pay for OAS, meaning benefits are financed with current taxes. As OAS currently stands, the program represents a considerable unfunded liability.

Increasing the age of eligibility to 67 would not have completely resolved the problem, but it would have reduced the unfunded liability. According to our latest calculations, OAS had an unfunded liability of $563.8 billion—this with the age of eligibility at 65. The plan to increase the eligibility age would have reduced the unfunded liability by $69.4 billion to $494.4 billion.

In this context, delaying eligibility for OAS by two years to age 67 was in fact a modest step to reducing the program’s long-term costs. And now, the government is proposing to undo even this reform.

There are other options for reforming OAS that would help put the program on better financial footing. One such option is to change the income eligibility for full OAS benefits. Currently, individual seniors are eligible for the full OAS benefit up to an income of $72,809 (2015 income tax year). Seniors with incomes between $72,809 and $118,055 receive partial benefits, which are reduced by 15 per cent for each additional dollar of income above $72,809.

Because benefits are calculated on an individual basis, two seniors living together could have a household income of $145,618 and still qualify for full OAS benefits. Alternatively, senior couples could have a combined income up to $236,110 and still receive partial OAS benefits. In other words, a household with income well over six figures could receive full or partial benefits.

Since OAS is funded out of general government revenue, Canadian workers are funding a program that provides benefits to seniors who often have higher incomes. Transferring money from workers to middle and in some cases upper-income seniors makes little sense and is arguably not the best use of public resources. Lowering the income eligibility would alleviate this issue and reduce the cost of the program in both the short-term and long-term.

For example, the federal government can lower the income eligibility for full benefits to $53,600, integrating the eligibility of OAS benefits with the maximum pensionable income under the Canada Pension Plan. Doing so would save approximately $1 billion. These savings could be re-allocated to focus on seniors who actually struggle financially in retirement rather than continuing to transfer income to middle and even upper-income seniors.

Cancelling the plan increase to the age of eligibility for OAS reverses progress made towards reducing the program’s unfunded liability. The Trudeau government should reconsider its proposal.