In spite of some vehement opposition, the government will probably announce in the next budget the raising of the retirement age for OAS pension to 67. We have already been assured it won’t happen at least until 2020 so it will not affect Canadians over 57. The big question is whether this change will increase poverty among seniors. The answer depends largely on how the increase in retirement age is implemented.
First, anyone nearing retirement should find it encouraging that Canada’s retirees are currently doing better financially than most of us realize. If we use Statistics Canada’s low-income cutoffs as the poverty threshold, just 5.2% of seniors would be classified as poor. By comparison, the poverty rate for Canadians age 18-64 is 10.5%, more than double. Similarly, seniors are faring much better than their counterparts in other developed countries. Based on OECD statistics, the poverty rate for seniors is 22.4% in the U.S., 22% in Japan and 17.6% in Switzerland, all roughly three to four times the rate in Canada.
Much of the credit for this happy result is the Guaranteed Income Supplement (GIS) which is payable to low-income Canadians who are eligible for OAS. What will become of the GIS if the OAS retirement age rises to 67? I see three scenarios. One is a decoupling in which the GIS will still be available at 65 and the amount will be increased to make up for the loss of OAS. If so, low-income Canadians will be virtually unaffected by the change in OAS retirement age and the government will still garner some savings to the extent less OAS is paid to middle income seniors. This is the most benign outcome.
Under a second scenario, GIS will continue to be payable from 65 but with no change in the maximum amount. In that case, future low-income retirees will lose $540 a month of OAS pension until age 67. The middle-aged who are caught by the change in retirement age will find this a hardship though that can be mitigated by a slower phase-in that extends beyond 2020.
The most draconian scenario would see GIS eligibility increased to age 67 to align with OAS. For a single person, this means the loss of up to $1,272 a month in pension for two years. It is unlikely something this drastic could be fully phased in as early as 2020. It took over thirty years to reduce poverty among the elderly to the low levels we now enjoy and it would be a tragedy to unravel what has generally been a very positive result.
The other possibility is that OAS and GIS will be made available over a range of ages with actuarial reductions or increases, the same as CPP which can be taken any time between 60 and 70. Making this work presents an interesting actuarial problem given that the GIS is subject to an income test.
In the longer run, Canadians will accommodate to a higher retirement age, but that will take time. We first need to change how we think about work and retirement. Age 65 was an arbitrary choice as the normal retirement age in the first place, the same as it was an arbitrary age for mandatory retirement, which has since been abolished. The retirement age could just as easily have been 70, which in fact is what it was when the Old Age Security Act was first introduced in 1952. Since then, life expectancy has increased by about six years so even if OAS starts at age 67, we are still enjoying OAS payments for about nine years more on average than was the case in 1952. Unfortunately, this is small comfort to middle-aged, low-income Canadians who were counting on OAS at 65.