Public pension programs are holding up

The number of beneficiaries of the basic old-age pension will increase by 53% between 2020 and 2035. (Photo: 123RF)

As the economy deglobalizes,Government and private pension programs are facing “challenges not seen by the global economy in decades,” according to the Mercer CFA Institute Global Pension Index 2022: rising inflation, rising public debt, rising interest rates, rising temperatures, the war in Ukraine.

And that’s not all. The number of Basic Old Age Pension (OAS) recipients will increase by 53% between 2020 and 2035, from 6.6 million in 2020 to 10.1 million in 2035, according to the 16th Actuarial Report on the Old Age Security Program by the Office of the Superintendent of Financial Institutions (OSFI). Currently, retirees receive $691 per month up to an individual income of $79,845 for 2021. This means that annual spending will rise from $46.3 billion in 2020 to $94.3 billion in 2035 and reach 195 in 2060 .5 billion USD.

Old age security is still only a small part of GDP

That’s a lot of numbers and growing limitations. Will this result in lower pension benefits? Apparently not, as the SV program still seems pretty solid. “When we do projections, economic growth means that the government’s ability to pay pension benefits is greater than the increase in benefits themselves; in other words, expenses are growing less than income,” says Denis Latulippe, an actuary and associate professor at the School of Actuarial Science at Laval University.

As for OAS spending, OSFI predicted that despite nearly doubling, program costs would peak around 2035 at 3.1% of GDP before falling to 2.63% of GDP in 2060. the 1990s,” explains Mr Latulippe. The more recent revision of the 17th actuarial report, which complements the previous one, hardly changed these projections: a peak of 3.12% of GDP would be reached in 2030, then decline to 3.03% in 2040, 2.77% in 2050 and 2.63% in 2060.

OAS: pay as you go

The correlation between OAS spending and GDP is certainly interesting, but the most telling correlation is with the federal government budget. We must not forget that old age security benefits, which include Government Income Supplement (GIS) benefits for the poorest seniors, come directly from government spending. OAS, unlike CPP, is an out-of-pocket plan.

The numbers are reassuring at first glance: in 2012, total spending on old-age security was $41.1 billion, or 5.7% of total federal revenue of $711.5 billion.

The numbers above are part of the OSFI base case. The Bureau also projects lower economic growth with a lower activity rate (76.2% versus 79.2% in the most optimistic scenario), very low wage increases (0.3%) and a lower higher unemployment rate (8.2% versus 6.2% ). In this scenario, OAS spending increases further to reach a relatively modest level of 3.78% of GDP in 2060.

However, certain assumptions made in all OSFI scenarios prove to be questionable. One of the main projections is an inflation rate of 2.0% between 2021 and 2060, a questionable assumption. For example, under the pressure of recent inflation, old-age benefits were indexed by 6.3% in 2023.

There is a chance that inflation will fall, but there is an equal chance that it will remain well above the Bank of Canada’s 2% target for the foreseeable future. If so, the OAS could represent a significantly larger share of federal spending, putting more pressure on the federal budget.

Canada is doing well on the international stage

International comparisons cast Canada’s public pension system in a relatively favorable light. As a percentage of GDP, the Organization for Economic Co-operation and Development (OECD) put Canada’s 2017 level of public spending at 4.8% of GDP and 11.6% of total public spending, levels among the lowest among developed countries.

Our numbers are somewhat different from the above, which we cannot fully explain. Denis Latulippe states that the figures associated with GDP should be interpreted as the aggregate profits or income of the economy, which represent approximately 50% of GDP. Thus, when OAS benefits are reported at 3.1% of GDP in 2035, they need to be recalculated to around 6% of GDP.

For example, in the United States, government spending on retirement benefits was 7.1% of GDP and 18.4% of government spending. In France these figures are 13.6% and 24.2%, in Australia 4.0% and 10.9%. The OECD averages are 7.7% and 18.4%. These numbers suggest that Canada still has a relatively comfortable cushion compared to other advanced economies.

The Mercer Pension Index ranks Canada’s pension system 13th out of 44 systems with an overall score of 70.6. The average score is 63, with Iceland and the Netherlands taking the top spot with scores of 84.7 and 84.6, respectively, while the United States and France are at 63.9 and 63.2.

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