Why 68 or 70 should be the new 65
Posted on November 23, 2010 in Social Security Debates
Source: Globe & Mail — Authors: Martin Hering, Thomas Klassen
TheGlobeandMail.com – News/Opinions/Opinion – Special to Globe and Mail Update
Published Tuesday, Nov. 23, 2010. Martin Hering And Thomas Klassen
A special House of Commons debate on pension reform will be held Tuesday, a month before federal and provincial finance ministers meet in Alberta to discuss options for increasing Canada Pension Plan benefits and ways to pay for higher benefits. While a contribution rate increase is being considered, a retirement age increase is unfortunately not yet on their agenda.
Members of Parliament will have the opportunity to put this option on the table, and they should seize it: A retirement age increase could break the reform stalemate, make the CPP more stable, maintain fairness across generations and help Canada reclaim its role as a world leader in pension reform.
An age eligibility increase could break the deadlock in pension reform.
If the retirement age were to stay at 65, an increase of the income replacement rate would lead to a proportionate increase of the contribution rate. This unavoidable trade-off is the biggest obstacle to reaching a consensus on pension reform across the country.
However, if the retirement age were to be increased, new possibilities for a national consensus would open up: either a major benefit increase with only a modest contribution rate hike, or a modest benefit increase with only a minor contribution rate hike.
An increase of the CPP eligibility age will be essential to keep the contribution increase within limits that are acceptable to all provinces and parties and fair between generations. It will also be essential to maintain similar benefit levels and contribution rates in the CPP and the Quebec Pension Plan.
An age eligibility increase would restore the CPP’s needed capacity to adjust to economic and demographic contingencies.
Over the past decade, the CPP has lost its capacity to absorb unforeseen economic and demographic fluctuations. In 2001, when the minimum contribution rate was 9.80 per cent, the plan was able to absorb almost any fluctuations; right now, the CPP has no policy flexibility, because the minimum contribution rate of 9.86 per cent is almost at the legislated rate of 9.9 per cent. Likely fluctuations, such as higher life expectancy gains or lower investment returns, will thus automatically lead to a contribution rate hike.
The chief actuary warned last week that the continuation of recent increases in life expectancy “could cause the minimum contribution rate to increase above 9.9 per cent.” If that were to happen, an immediate increase of the legislated contribution rate would be unavoidable and destroy trust in the CPP’s stability and sustainability.
An age eligibility increase would also distribute the costs of longer pension payments equitably across generations.
Life expectancy growth has been consistently underestimated – and is still underestimated. The latest official projections of life expectancy at age 65 in 2050 are about three years higher for men and two years higher for women than they were in 2001. “If recent improvements in mortality, especially for ages 75 to 89, continue, the long-term assumptions will need to be adjusted accordingly,” the chief actuary warned last week.
There is major uncertainty about how much life expectancy is going to rise. Over the next 40 years, life expectancy at age 65 will increase by between two and five years, according to new official projections. Fairness between generations dictates that, if life expectancy should rise, eligibility ages should too.
An age eligibility increase would help Canada regain its leadership role in pension reform.
Higher retirement ages are a worldwide – and unavoidable – trend, yet Canada has become a laggard in pension reform. Six countries – Australia, Britain, the United States, Germany, France, and Denmark – have passed laws raising the eligibility age from 65 to 67 or 68 years. Three more countries, Ireland, the Netherlands, and Spain, will soon follow in their footsteps. Almost half of OECD countries will increase retirement ages over the coming four decades. To think that the retirement age in Canada could stay at 65 years is a delusion.
The mid-1990s reforms, which introduced such major innovations as the steady-state contribution rate and the CPP Investment Board, made Canada a global leader in pension reform. A well-designed retirement age increase that improves fairness across generations and protects the most vulnerable would again put Canada at the forefront of global pension reform. Now is the time to discuss this.
Martin Hering is a political science professor at McMaster University, and Thomas Klassen is a political science professor at York University. They are the authors of Is 70 the New 65?, a new report by the Mowat Centre for Policy Innovation.
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Tags: budget, pensions, standard of living
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