Reforming Old Age Security: A Social Work Perspective

Transcription

1 Reforming Old Age Security: A Social Work Perspective

2 Ce document est disponible en français. Canadian Association of Social Workers 383 Parkdale Avenue, Suite 402 Ottawa, Ontario K1Y 4R CASW Canadian Association of Social Workers (CASW) Reforming Old Age Security: A Social Work Perspective 2012

3 Reforming Old Age Security: A Social Work Perspective Introduction The federal government recently announced its intention to reform Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Specifically, it will gradually increase the age of eligibility for the OAS pension and the GIS between the years 2023 and 2029 from 65 to 67. As a corollary, it will also increase the age of eligibility for the Allowance from 60 to 62. The government gives four main reasons for the change. The first is that the current program is unsustainable in its current form. The second is that Canada s population is rapidly aging. The third is tax fairness. The fourth is the need for Canada s labor market and economy to adapt to an aging society. 1 To understand the implications of the changes, it is important to note that the Old Age Security program is the cornerstone, or first pillar, of Canada s three-pillar retirement system and affects all Canadians regardless of age since it is financed from the Government of Canada s general revenues which are collected each year. 2 The OAS program includes includes the basic OAS pension, the GIS, the Allowance and the Allowance for Survivors. The OAS pension is a monthly benefit which is available to most Canadians 65 and over. The maximum annual OAS benefit is currently $6,481. To qualify, a person must be 65, meet residency requirements, and be a Canadian citizen or legal resident of Canada. Since 1989, OAS is also subject to a clawback of benefits for higher income recipients. 3 The GIS is also a monthly benefit which is paid to eligible residents of Canada who receive a full or partial OAS benefit and who have little other income. The maximum benefit is $8,788 for single seniors and $11,654 for couples. 4 The GIS stops being paid at $39, Recipients must apply annually for the benefit but unlike the OAS, it is not subject to income tax. The Allowance, which also includes an allowance for surviving spouses, or common law partners, of deceased OAS pensioners, is designed to aid those who are between the ages of 60 1 Service Canada, Questions and Answers regarding the changes to the Old Age Security Act, 2 The second pillar is the Canada Assistance Plan. The third are private pensions, most of which receive tax assistance. The second and third pillar are not the focus of this report. 3 There is an income test for the OAS which was introduced by the Conservative Government of Brian Mulroney. Currently, the benefit is partially reduced for any recipient having an net income over $70,000 (approximately) and fully reduced at an income of $113,000 (approximately). 4 Budget 2012, Chapter 4 5 Service Canada,

4 and 64 (near seniors). Like the other benefits, it is subject to residency requirements. The Allowance is income tested. The maximum that is paid is equal to the combined full OAS benefit and the maximum GIS benefit. In terms of cost, the OAS pension is the largest. In 2012, it is anticipated that the total cost will be $31 billion for about 5.1 million beneficiaries. By contrast, the GIS will cost $9.4 billion for 1.8 million recipients and the Allowance $577 million for 89,000 recipients. 6 Social Work Perspective In attempting to assess the proposed reform of the Old Age Security program, the Canadian Association of Social Workers (CASW) places a priority on the impact of the change on women. It has been a primary concern of the association since Hence, we initially look at the reform from that perspective. Secondly, we consider the position of the government that the current old age security program is not financially sustainable. We do this in two ways; by assessing the financial burden on the federal government and by comparing the Canadian experience with western Europe. If, as claimed, the current system is unsustainable, reform may be necessary even if it is judged to be unfair to some senior, and near senior (60-64), recipients. Thirdly, we consider briefly some alternative reforms to those proposed by the government. In order to examine social policy reforms such as those proposed for old age security, CASW uses guidelines which are based on social work codes of ethics (Appendix 1). The codes place a high priority on human rights and social justice. Hence, our evaluation is not driven by a bias toward, or against, any particular government. Rather, it is guided by a set of principles which are consistent with social work values. Impact on Women It is generally agreed that the Old Age Security program has been an important source of income for low income seniors and largely successful in bringing most seniors above the poverty line. However, there is still a significant percentage of single seniors, particularly women, who fall below the low income cutoff (commonly called the poverty line). According to the most recent data, for example, only 1.6% of married senior women in 2009 were living below the low income cutoff (after tax) while 15.2% of single senior women were low income. 7 6 Caledon Institute of Social Policy, Old Age Insecurity?, 2012, page 1 7 Statistics Canada, Person in Low Income After Tax (in percent 2005 to 2009), CANSIM table

5 To some extent, the percentage of low income single senior women may have been reduced since then as some of them will have been eligible for additional annual benefits of $600 for single seniors (and $800 for couples) which the government introduced in the 2011 budget. 8 Even with the increase, though, the maximum combined benefit of OAS/GIS ( $15,269) is still less than the low income cutoff for residents in larger cities. 9 For senior women, the Old Age Security program is a far more important source of income than for men. In 2008, fully 52.6% of the income of senior women came from government transfers compared to 37.5% for men while 30% of senior women s income came from the Old Age Security program compared to 16.9% for men (Table 2). Because of the high level of dependency on income transfers from government, low income senior women will be disproportionately affected by the change in the age eligibility for the OAS program. They rely upon the program more than men and will suffer more because of the reduction in the number of years that they can receive benefits. Many women currently aged 60 or older, who depend on OAS/GIS or the Allowance, probably did not work outside the home for significant periods of time, so they were not able to build up private pension incomes in their own names. And if they did work outside the home, they were more likely than men to be employed in low paying jobs., While more women coming up to retirement in the future will have spent most of their adult lives in paid employment, many are working in non-standard work arrangements which are unstable, part-time and tedious. Moreover, these precarious jobs are generally poorly paid and without benefits such as pensions. As well, women s average earnings are still below those of men, even when both are working full-time for a full year. 10. For many low income women, now and in the future, receipt of old age security benefits is the first time they will have a stable income which brings them close to, or above, the low income cutoff. For some, it is actually an improvement in their standard of living. Also, the option to work for pay is frequently not an option for women who are forced to retire early to care for an older or disabled family member. In a recent report of Statistics Canada on retirement, health and employment, it was found that women were more likely to be retired than men by age 55, many due to chronic health conditions. Almost one half of retired women reported having arthritis compared to 34% of men. 8 The top-up only applies to individuals with an income (other than OAS/GIS) of 2,000 or less and a couple of $4,000 or less. 9 The low income cutoff is not available yet for In 2010, the low income cutoff for cities of 500,00 or more was $18,759. See Statistics Canada, Low Income Cut-offs after tax, Monica Towson, Financial Security for Women Seniors in Canada, Canadian Association of Social Workers, 2007, page 8.

6 Many older workers were having trouble staying employed due to poor health even if they were not financially prepared to retire. 11 Despite these differences in employment history and family responsibility, women are now being told that they must wait two more years to quality either for OAS/GIS or the Allowance. Instead of receiving social benefits which provide dignity and respect at 60 or 65, they are being told they must wait two more years, continue working in precarious jobs or go on provincial welfare schemes. For higher income seniors, the extra two years may be a choice. For low income women, they are a deterrent. Financial Sustainability In budget 2012, the government justifies the increase in age eligibility by highlighting two trends; the decline in the number of workers per senior by the year 2030 and the increasing life expectancy of seniors in the future. The present OAS program was put in place in the 1950 s when seniors were not living as long as they are now and when the percentage of workers to retirees was larger than at present or will be in the future. In 2010, there were 4.4 workers per senior. By 2030, there will be 2.4. Looking ahead, the demographics are also changing. In the 1970 s, the average life expectancy for men was 69 and for women 76. Currently, it is 79 for men and 83 for women. By 2031, it is projected to be 82 and 86 respectively. 12 Given these demographics, the government notes that the cost of the OAS program will increase from $38 billion in 2011 to $108 billion in 2030 essentially a tripling of costs in less than twenty years, due in considerable measure to the retirement of baby boomers. On the surface, the government s concern about rapidly rising costs seems appropriate. One pundit, entirely in support of the OAS program reform, claims that it is time baby boomers stop living off the avails of future generations. 13 He says that the reform should be cheered by Canadians under the age of fifty because they have to take on the tremendous burden facing future generations, including those who are not even born Jungwee Park, 2011, Retirement health and employment among those 55 plus, Statistics Canada. 12 Budget 2012 Chapter 4, chart 4.2 and Statistics Canada, Canadian Demographics at a Glance, page Jim Middlemiss, Time to reform the OAS, Canadian Lawyer, 14 John Ivison, a political columnist of the National Post, agrees with Middlemiss s assessment. Note to Bob Rae: Yes, we have a pension problem,

7 The problem with the concerns about rising costs is that they do not take into account our ability to pay. Nor do they consider what the government s chief actuary and budget officer are saying about the financial burden. When this is done, the perspective is somewhat different. In 2011, the chief actuary issued a report on the OAS program to take into account the increases which the government introduced to the GIS in the budget that year. The report also included an assessment of the total cost of the entire OAS program and projected the cost into the future, based on the percentage of our gross domestic product or GDP (i.e., our ability to pay). The actuarial report confirms that the nominal cost of the OAS program increases significantly from the present until 2030 but it also includes an additional, very important, finding. The cost, as a percentage of GDP, increases less than 1% from 2011 (2.37%) to 2030 (3.16%) and then falls back to the same percentage of expenditure by the year 2060 (2.35%). In terms of our ability to pay, it is hardly a burden on future generations (Table 3). Another way to look at the future financial burden of the OAS program is to compare projected expenditures against employment earnings since they give some idea of how the cost will impact directly on workers in the labor force. Like the relation to the overall economic capacity of the country (GDP), expenditures on the OAS program, as a percentage of total employment earnings (Table 4), rise from 2012 (5.27%) to 2031 (7.12%) and then begin to fall to levels which are similar to what they are today. A recent report by the Parliamentary Budget Officer (PBO) also casts doubt on the government s assertion that the OAS program is fiscally unsustainable. Using slightly different data than the chief actuary and taking into account the potential enhancement of benefits in the future through cost of living increases, the PBO concludes that the overall federal debt to GDP will decline with or without the OAS reform. Also, when the PBO compares expenditures on benefits to both the percentage of the revenue of government and program spending, a similar pattern occurs to what we observed in relation to the GDP and employment earnings they rise until about and steadily decline thereafter (Table 5). Still another factor that will moderate future expenditures is a trend, likely to increase in the future, toward a delay in the age of retirement. Age 65 is less and less a marker for retirement, particularly among professional and skilled workers. Since the 1990s, the employment rate of older Canadians has grown significantly. 15 One consequence of the trend is that in spite of increasing life expectancy (or maybe because of it), the length of retirement, is about the same now as it was in While the overall trend toward delayed retirement can be used to bolster the government s argument for an increase in age eligibility, it is important to recognize that many low income workers, especially those with an illness or disability or precarious job, will not be able to 15 Yves Carriere and Diane Galarneau (2011), Delayed retirement: A new trend?, Statistics Canada.

8 exercise the choice of higher paid workers to extend their period of employment. And they are least likely to replace lost income from an increase in age eligibility. European Experience Prime Minister Stephen Harper initially announced his intention to slash the cost of the OAS program at the World Economic Forum in Davos, Switzerland. His message seemed to be directed as much to heads of European governments as to Canadians. For the past few years, both he and his finance minister, Mr. Flaherty, have been preaching the virtues of fiscal conservatism and encouraging the Europeans to follow the Canadian lead by rapidly reducing debt and cutting expenses on social programs. By implication, he does not like the high social expenditures of Europe. In reality, Canada does not have social expenditures in the form of cash benefits or services - at the level of most western European countries. 16 In 2007, for example, public social expenditures, as a percentage of GDP, were 19.3% on average across OECD (mainly European) countries. Canada s social expenditures, at 16.9%, were below the OECD average and far below most European countries. 17 Since 2007, due in large measure to the economic crises of , social expenditures, including those of Canada, increased but Canada s estimated expenditures in 2012 will remain at 19.3% - below the OECD average of 22.1% and way below most European countries. 18 In the last three years, Canada s expenditures on social programs have stabilized, not increased (Table 6). Furthermore, Canada s public social expenditures on pensions are also modest in comparison with European countries. In 2012, they are estimated to be 4.7% or about half of what they are in Germany, a third of France and far behind countries with huge debt like Greece or Italy (Table 7). On the other hand, despite the relatively low level of social expenditures in Canada compared to Europe, the Harper government reasons that Canada should follow the European countries which are increasing the age of eligibility of their pension programs to offset their rising costs. There are, in our judgment, three reasons why Canada does not need to do so. The first, as already outlined, is the relatively modest level of social expenditure, including public pensions, in Canada. The second is the higher dependency ratio in many European countries (in the range of 25 to 30 older people per 100 working population) compared to Canada (20 per 100 working 16 Willem Adema, Pauline Fron, Maxime Ladaique 2011), Is the European Welfare State Really More Expensive?. OECD Social, Employment and Migration Working Papers No OECD (Organisation for Economic Cooperation and Development) is an international organization of developed countries, including most of the European and Anglo American countries such as Canada, which provides data and studies on the social and economic challenges faced by member states. 18 Estimates only

9 population). 19 The third is a tendency for people, in European countries, to retire before the age of 65 because of the generosity of their schemes. The Canadian government is not faced with the same level of fiscal constraint as its European counterparts. Nor is there a serious fiscal challenge in Canada because of the existing OAS program. While the government may choose to increase age eligibility to reduce the deficit and maintain low taxation, European pensions, and related social expenditures, bear limited resemblance to the Canadian experience. The current OAS program is sound and affordable. Reports from independent agents of Parliament, such as the chief actuary and the budget officer, confirm that it is fiscally sustainable. Canada is not dealing with European style social expenditures. This is not to suggest, however, that social reform of the OAS program is undesirable or impossible, only that it is disingenuous to increase age eligibility on the basis of fiscal sustainability. Alternative Reforms Some alternative reforms being proposed by the Caledon Institute of Social Policy and the Canadian Labour Congress (CLC) look promising and are worthwhile considering. They are also compatible with CASW social policy principles (Table 1). One measure proposed by Caledon is to protect low income seniors and near seniors from a rise in the age of eligibility by extending an income test mechanism now in place for the Allowance and the Guaranteed Income Supplement to all seniors from 60 to A related reform, advocated by Caledon, is to allow all seniors from 60 to 70 to choose their age of retirement and to adjust the benefit level actuarially to take into account age differences when seniors begin to draw on OAS. A third is to bolster the Guaranteed Income Supplement to make sure that all seniors and near seniors have income above the poverty line. The CLC proposes an increase of 15%. A fourth and final proposal is to replace the current OAS program by a comprehensive and progressive senior benefit which could be income tested in a way which improves benefits for the vast majority of seniors but reduces the benefit for high income individuals and couples. 19 The World Bank, Age dependency ratio, 20 For further detail on these and other reform proposals, see Ken Battle, Sherri Torjman and Michael Mendelson (2012), Old Age Security? and Canadian Labour Congress, Increase OAS/GIS Benefits, Retirement Security for Everyone.

10 Table 1 Canadian Association of Social Workers Social Policy Principles Dignity and Respect: each individual has a right to self-fulfillment to the extent that the right does not encroach on the rights of others. To that end, social policy measures should intrude as little as possible on the choices which individuals make to realize their own personal life goals. Equality: because of the intrinsic worth of every human being, each person shall be treated equally without unfair discrimination on the basis of disability, color, social class, race, religion, language, political beliefs, sex or sexual orientation. Equity: individuals and families are to be treated equally if they are in like circumstances; social inequalities are considered just only if they result in compensating benefits for the least advantaged in society. Comprehensiveness: all persons in Canada are entitled to educational, health and social services and social security on uniform terms and conditions in a manner which assures a range of choice and maximizes respect for the individual. Quality Services: services are to be based on best practices and a participatory approach to their administration and improvement. Constitutional Integrity: social programs are to be financed, regulated, and provided with full regard to the jurisdictional responsibility and competence of each level of government. Subsidiarity: social programs are to be provided at the lowest level of community provision possible unless it can be shown that they can be more effectively provided by higher levels of government. Social Dialogue: governments should take all necessary steps to encourage and facilitate extensive consultation with relative social partners in the development of social policies and the administration of social programs.

11 Table 2 Income sources as percentage of total income of women and men aged 65 years and over Canada, 1998 and 2008 Income Source Women Men Women Men dollars Total Income 40,996 50,582 58,662 74,093 percentage Market Income Earnings Wages, salaries and commissions Self-employment income Self-employment, farm Self-employment, non-farm Investment income Retirement income Other income Government Transfers Old Age Security, Guaranteed Income Supplement and Spouse's Allowance Canada Pension Plan and Quebec Pension Plan Child Tax Credit F F F F Unemployment Insurance benefits F Workers' compensation benefits Goods and Services Tax and Harmonized Sales Tax credits Provincial and territorial tax credits Social assistance not available for a specific reference period 1. Retirement income includes pension benefits, superannuation payments or annuities generated by employer pension plans. Source: Statistics Canada, Labour Force Survey, CANSIM table

12 Table 3 Financial Status of OAS Program Year Number of Beneficiaries (thousands) Expenditures ($ million) GDP OAS GIS Allow OAS GIS Allow Admin Total $ billion Exp. as % of GDP ,889 1, ,468 8, ,917 1, ,091 1, ,290 9, ,377 1, ,289 1, ,141 9, ,719 1, ,482 1, ,022 10, ,141 1, ,679 2, ,987 10, ,665 1, ,782 2, ,018 14, ,239 2, ,043 2, ,967 18, ,618 2, ,302 3, ,981 23, ,694 3, ,507 3, ,525 32, ,898 5, ,282 3, ,723 40, ,354 7, ,159 3, ,118 50, ,801 11, Source: 10 th Actuarial Report on the Old Age Security Program

13 Table 4 OAS Program Expenditures Percentage of Total Employment Earnings (Projected) Year Earnings OAS GIS Allowance Admin Total $ billion % % % % % , , , , , , , , , , , , , Source: Office of the Chief Actuary, 9 th Actuarial Report on the Old Age Security Program Table 5 Projected Elderly Benefits ($ billions, percentage of revenue/program spending) Year $ billions % Revenue % Program Spending Source: Office of the Parliamentary Budget Officer, Federal Fiscal Sustainability and Elderly Benefits, 2012

14 Table 6 Public Social Expenditures as % GDP, Projected from 2008 to 2012 Country Australia Austria Belgium Canada Chile m m Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan m m m m Korea Luxembourg Mexico m Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey 10.5 m m m m m United Kingdom United States OECD Source: OECD Social Expenditure Database (SOCX)

15 Table 7 Public Social Expenditures on Pension as % of GDP, Projected from 2008 to 2012 Country Australia Austria Belgium Canada Chile m m Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan m m m m Korea Luxembourg Mexico m Netherlands New Zealand Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey 6.1 m m m m m United Kingdom United States Source: OECD Social Expenditure Database (SOCX)