Stephen Harper’s big speech in Davos at the World Economic Forum sent everyone with a cane and walker scurrying in fear. Although not explicitely stated, the fear that the release of Old Age Security (OAS) would be raised to 67 from 65 caused a panic among the great many that rely upon the system to support them in their twilight years. Reforming the OAS system is an easy adjustment that can be made in terms of avoiding a potential financial crisis in the distant future as less workers provide less money into the OAS system. As much as many of us may dislike Harper, or some of the policies that he has put forth, we all need to step back and remember that he’s not a complete idiot.
The OAS age increase is likely to be setup to only affect people who are currently below a certain age, likely members of Generation X or, if Harper’s really smart, the Millenials (the boomer’s children). The numbers behind this are simple. The elderly, and the many boomers beginning to consider retirement, are the most likely to actually go out and vote, while the Millenials are the least likely. Additionally, by having the change affect a younger generation, that would, in theory, provide them with additional time to better invest in their future retirement before it sneaks up on them. Boomers don’t have the room between now and their hopeful retirements.
Although the changes make sense for future generations, they don’t solve any budgetary difficulties that we’re currently experiencing, and may even be insufficient, given the assume 6+% gains on investments for the Millenials when they do begin to contemplate retirement. Like municipal policies of a decade ago, which saw short-term savings at the future cost of crumbling infrastructure, this continues to put the costs on future generations. Something that every person exiting the workforce and entering retirement should remember as they take a trip to Florida using the “free money” their children and grandchildren have to put aside in OAS.
In my opinion, moving it from 65 to 67 is a joke. It’s a quick and simple move that accomplishes very little, now or in the future, especially as the amount that someone on OAS receives is not even remotely enough to live by. In many countries there is no OAS, so it is true that we should be thankful for what we have, but considering when this change is going to kick in, we can do better. I have a couple ideas that no one is going to particularly like, except maybe an economist.
First, the age should be raised back to 70, and should then float based on the average Canadian life expectancy (ACLE). If ACLE increases two years, so should the starting age for OAS payments. Secondly base OAS payments should increase to the average cost-of-living in Canada, which will afford our seniors more financial independance and respect. This base amount should then be reduced at the rate of $0.25 per dollar of any pensions or RRSPs that the individual collects in that year. This would scale the payment amount, allowing for seniors that saved well, to do well, without being a drain on what will forever be a strained OAS system, and continue to have funds should they live longer than their RRSPs last.
So how does this look? Well, I’m at the very beginning of the Millenials, falling as one of the oldest of that particular generation. This will make me likely to be the first to be affected by the changes Harper is introducing, and would also put me as one of the first to be affected by the changes that I would recommend (though I’d much prefer for it to begin with Gen Xers to get some kinks ironed out in advance of my blissful retirement). We’re going to take some assumptions because I’m way too lazy to look up real data for a theoretical.
|Category||At Date of Changes||Scenario A, In 50 years||Scenario B, In 50 years||Difference|
|Average Life Expectancy||86||96||96||+10|
|Average Cost of Living||$28000/year||$48000/year||$20000/year||+$20000 (Scenario A)/ – $8000 (Scenario B)|
|Initial OAS Age:||70||Initial RRSP Negation-level:||$112,000/year|
|OAS Kicks in at Age:||Amount of OAS:||Amount of RRSPs/pensions to negate OAS:|
A good economist can work out the exact details, but by this formula I believe we can ensure that OAS is sustainable, and will ensure that the elderly are properly taken care of financially throughout their twilight years. Although not demonstrated above, this would also work if the ACLE were to decrease. Is it a great system? Meh. Would it be a popular system? Probably not. Is it better than the stretch we’re looking at where we increase the age OAS kicks in, and it isn’t enough for anyone to live? Most definitely.
Please comment below with your thoughts on how we can improve OAS, and opinions of Harper’s changes, or even problems with my suggestion. I look forward to reading and responding to your conversation.
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