The federal government is poised to issue a firm policy direction on Old Age Security in the upcoming budget centred around raising the age when retirees can start to collect.
Several government sources now say the budget will lay out a path forward, rather than launch a national conversation or policy paper on proposed changes despite considerable discomfort within the Conservative caucus on OAS changes.
“We have to take action right now to make sure that there are OAS funds there for seniors, not just for today’s seniors, but for the seniors of the future,” Human Resources Minister Diane Finley said Wednesday during Question Period.
“If we don’t take action now, there may not even be an OAS system for the future.”
The leading option is to increase the age of eligibility from 67 from 65 — an option Prime Minister Stephen Harper has publicly confirmed is under consideration.
The plan is to phase in the changes slowly and begin the process in a few years. One leading possibility — as uttered vaguely by Finance Minister Jim Flaherty last week and then retracted — is to start phasing in the increase in age in 2020, and make the change over five years.
Under that scenario, anyone now aged 57 or older would not be affected.
The OAS changes will likely be packaged together with cuts to public service pension packages, sources said.
But another option touted repeatedly by many experts is to change the clawback provisions so that richer recipients have to start paying back the benefit at lower levels of income.
That option is on the backburner, at least for now, government sources say.
Bureaucrats from several departments have been working on reform options for months, but officials insist that final decisions have yet to be made.
Conservative MPs expressed vocal concerns about the move at this week’s caucus meeting, but generally left the meeting thinking the big decisions were already made, sources said.
But OAS changes are so politically explosive and financially complex that even firm decisions on a general policy direction can still be subject to an infinite number of tweaks and variations after the fact.
University of Calgary economist Jack Mintz says an option he wrote about recently is making the rounds among MPs and officials. His idea would see new incentives included in the OAS system that would encourage, but not force, retirees to delay their collection of government benefits.
He would also de-index the threshold at which the clawback kicks in so that more and more people are gradually paying back bits of their OAS benefits over time. For now, the clawback begins once individuals make $67,000 a year.
But Mintz, like many of the other pension experts and economists contacted for this story, urged the government to set out the parameters of a debate about OAS without making any set-in-stone decisions quite yet.
“We need to have a better discussion of the issue,” he said.
The discussion would look at the fiscal pressures of aging, and then look at the best way to alleviate the pressure, he said. Instead of simply targeting OAS, Mintz is suggesting a thorough review would look at all benefits, tax credits and incentives related to retirement.
Raising the OAS eligibility age to 67 would likely save the federal government between 10 per cent and 15 per cent of the program’s cost every year, said independent pension expert Richard Shillington.
If the changes were enacted today, Ottawa would save between $3 billion and $4 billion. That would rise to more than $10 billion by 2030.
Shillington cautioned that the savings were a rough estimate, since the mix of people receiving OAS can change dramatically over time.
While the federal government has made it clear that changes to the OAS system will not affect today’s retirees or people nearing retirement age, ministers have not yet explained how they will deal with the Guaranteed Income Supplement.
The GIS is a sister program to the OAS that is meant to top up OAS payments for low-income seniors. The two programs are tied tightly together in practice and in legislation.
If the age of eligibility for OAS rises, the age to receive GIS would also rise — even though the combination of OAS and GIS has been widely credited for almost eliminating poverty among seniors.
The government could attempt to resolve the poverty issue by decoupling GIS from OAS, or targeting subsets of vulnerable seniors with extra benefits, said pension expert Bob Baldwin, who has advised the Ontario government on retirement security.
Harper took Canadians and his own caucus by surprise last month when he used a speech in Davos, Switzerland, to announce an overhaul of retirement benefits.
He did not explain his intentions or take any questions on the matter. Rather, he said “major transformations” were necessary to make sure OAS did not bankrupt the retirement system.
“Our demographics also constitute a threat to the social programs and services that Canadians cherish,” he said.
But an analysis done by Parliamentary Budget Officer Kevin Page shows that OAS is sustainable if Ottawa wants it to be. Now that the federal government has scaled back long-term increases in health care transfers, it has the fiscal room to continue with OAS if it so chooses, Page has concluded.