The federal government needs to raise the retirement age and relax the rules governing retirement savings vehicles, such as RRSPs, among other things, in order to ease the hefty fiscal pressure building due to Canada’s aging workforce, says a new report published Tuesday by the Toronto-based C.D. Howe Institute.
According to the report, The Fiscal Implications of Canadians’ Working Longer, demographic trends will stress government finances in the years ahead. The combination of a growing population of retirees, and slower workforce growth, will see the costs of programs such as healthcare, seniors’ benefits, education and child benefits, rise from 15.5% of gross domestic product (GDP) today to 24.2% by 2066, it projects. “In dollar terms, the present value of the unfunded liability for age-related social spending — amounts to $4.5 trillion,” the report says.
To help ameliorate the impact of these forces, the report recommends a number of policy actions. “First, and most obviously, the federal government should restore the previously scheduled increase in the normal age of [Old Age Security (OAS)] eligibility to age 67,” it says.
However, by itself, this won’t save government finances. The change would reduce the programs’ GDP claim to 23.2%; raising the effective retirement age to 69 would trim it further to 22.3%.
“These results are both discouraging and encouraging,” the report says. “On the discouraging side, even the sunniest scenario prefigures serious fiscal pressures. On the encouraging side, later average retirement would mitigate this pressure enough to materially improve the outlook for taxes and other programs.”
Along with raising the retirement age, the report also recommends that actuarial adjustments to the benefits that are payable under OAS and the Canada Pension Plan (CPP), “stay up to date, to ensure that people are appropriately rewarded for continuing to work after the age when they could first commence receipt.”
As well, other age-related rules need to be revised. “For example, restrictions on retirement saving after a given age and requirements to start drawing retirement income can affect decisions about when to retire,” the report says. “A key example is the requirement for RRSP savers to start drawing down their savings, now taxable, at age 71. Abolishing that requirement outright is an attractive idea. Failing that, the trigger age should rise immediately and continue to rise with longevity.”
Ultimately, enabling people to work longer won’t eliminate the fiscal pressures that demographic change will likely create, the report says that, those “pressures are so large that policymakers should pursue a variety of avenues to mitigate them.”
“The gains outlined in our projections are well worth having — policy changes to promote later retirement would reduce the unfunded liabilities future finance ministers will otherwise need to confront and brighten the fiscal futures of Canadians,” it argues.
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