The Myth of Pension Reform

The following myths and misperceptions make it easier for governments to slash away at public pensions and reduce Canadians’ ability to save for retirement.

Myth #1: Universal pensions are an out-dated notion
Some people have argued in recent years that the concept of universal OAS pensions — available to everyone over a certain age, regardless of income — is an out-dated notion. In fact, income-based pensions are a throwback to the 1930s and a concept that Canada rejected in the 1950s. Most people who object to the OAS do not realize that it was established as a funded pension, with Canadians making contributions throughout their working lives and then receiving a return on that investment when they retired. OAS payments are taxed as part of income so Canadians who have higher incomes have more of their OAS taxed back.

Myth #2: Old Age Security Pensions Contribute to the Deficit
Some observers argue that public pensions are a major cause of government deficits, and that the government could save $15.5 billion a year in OAS payments by eliminating the program. However, doing away with OAS would create other costs, including about10.5 billion in lost tax revenue and increased GIS benefits to ensure seniors the income level guaranteed by the program. The net costs of the OAS program are actually $5.0 billion a year — a sizeable amount, but well short of the $15.5 billion figure cited by the government. Repealing the OAS would also lead to significant losses in provincial tax revenues and increases in costs for provincial pension supplement programs.

Myth #3: Canada Can’t Afford Old Age Security Pensions for the “Baby Boomers”
With the impending retirement of the “baby boomers,” many argue that Canada will not be able to afford these retirement programs. However, what is lost in all the fear- and crisis-mongering is the fact that the first wave of baby boomers will not reach retirement age (assumed to remain at age 65) until 2011 — 15 years from now. The last wave of baby boomers will not reach retirement age until 2030 — 33 years from now. Not all of the 9.1 million baby boomers will be seniors at the same time. In other words, Canadian society has a window of over 30 years to adjust sensibly — rather than stampeded by panic — to the aging of our country.

Myth #4: The Seniors Benefit will Provide a Fairer Public Pension for Canadians
The government has tried to market the Seniors Benefit as a “fairer” approach to public pensions and more progressive social policy. However, its true purpose is to save money and reduce the deficit, at the expense of seniors. By the year 2030, the Seniors Benefit will allow the federal government to “save” $8.2 billion in OAS and GIS payments, as well as $4 billion in age and retirement income tax credits. The extra $120 a year that poorer seniors will receive will cost only $200 million.

Myth #5: Programs that Encourage People to Save for Retirement Only Benefit the Rich
Critics of RRSPs argue that RRSPs and employer-sponsored pension plans cost the Canadian government about $15 to $20 billion each year in reduced taxes. However, these critics overlook the fact that RRSP tax rules only defer the payment of taxes and do not eliminate them. Department of Finance projections indicate that, around the time the “baby boomers” retire in large numbers, the tax being collected on the income coming out of RRSPs will exceed the taxes lost through contributions to RRSPs. In other words, in about 20 years’ time, RRSPs will be providing a net boost — instead of a net drag — to income tax revenues.

Statistics Canada (1996) recently published several startling facts about the current state of RRSPs among younger workers:

  • more people are withdrawing funds from their RRSPs for a variety of reasons ranging from survival in today’s economy to down-payments on homes by first-time buyers

  • the average value of an RRSP is about $5,000, a pittance compared to what is needed to live in comfort and dignity in retirement, and

  • the changing nature of work — more short-term contracts and part-time — prevents the accrual of discretionary funds to contribute to RRSPs.
  • Even if younger people had the money to contribute to an RRSP, the proposed Seniors Benefit clawback is a powerful disincentive. As long as the government is going to clawback the tax-free Seniors Benefit at the proposed rates and income levels, it doesn’t make any sense for people with lower — or middle — incomes to save for their retirement. If they do, the main beneficiary of their efforts to contribute to an RRSP will be the government. Planning ahead and saving will actually cost them money.