Courageous, Admirable, and Misleading

What Prime Minister Stephen Harper said last week was courageous and admirable. It was also misleading.

I’ll begin with the “misleading” part because that’s always the most fun.

In a major speech in Davos, Switzerland, the Prime Minister suggested his government would reform Old Age Security “to ensure sustainability for the next generation while not affecting current recipients.”

What that means isn’t clear. Policy analysts have long talked about raising the retirement age from 65 to 67 but the prime minister didn’t say anything about that. And there were no details in the talking points re-leased later, aside from a promise that nothing would change for existing beneficiaries.

But the Conservatives were clear about why they want to act.

“The number of Canadians over the age of 65 will increase from 4.7 million to 9.3 million over the next 20 years,” the government’s talking points say. “Consequently, the cost of the OAS program will increase from $36 billion per year in 2010 to $108 billion per year in 2030.” There’s no way we can afford $108 billion a year, the government says, so the program will collapse if it isn’t changed.

All the government’s figures are accurate. And dishonest. If I ever write a textbook about how to lie with facts, I’ll use this as an illustration.

The Conservatives don’t mention two key facts about that $108-billion figure.

First, it factors in inflation. The Bank of Canada’s long-run target for inflation is two per cent per year – and two per cent a year for 20 years will inflate numbers by almost 50 per cent.

Second, costs aren’t the only thing that grows. So does the economy. And as the economy grows, so does our ability to pay costs like pensions.

The most meaningful way to measure this is to look at the cost of the OAS program as a share of the economy. Kevin Milligan, a University of British Columbia professor, did just that. Using figures from the chief actuary – the same data source as the government – he found that OAS will grow from a cost of 2.41 per cent of GDP to-day to 3.14 per cent in 2031. It is expected to gradually decline after that peak.

To put that another way, the cost will increase by three-quarters of one percentage point of GDP.

That’s “not trivial, it’s not nothing,” as Milligan says. But keep it in perspective. By one estimate, the bite that health care will take out of the economy will grow from 12 per cent to 18 per cent of GDP. That’s an elephant next to the OAS poodle. “When I think about the problems governments will face in 2031, I’m focused like a laser on health,” says Milligan.

As for suggestions that Canada will follow Europe over a cliff if it doesn’t curtail public pensions, consider that public pensions take a 14-per-cent bite out of the economy in Italy, and over 10 per cent in Ger-many and Belgium. The equivalent Canadian figure – for OAS and CPP combined – is four per cent.

Now, add the fact that CPP is fully funded and rock solid and there is nothing “unsustainable” about Canada’s public pensions. It’s dishonest of the Conservatives to say otherwise.

And yet it was courageous and admirable of the prime minister to raise the subject.

Every government lives in fear of angering old folks and nothing angers old folks like pension reform. Brian Mulroney knows that. So do Paul Mar-tin and Jean Chr├ętien. And Stephen Harper.

This is bad politics. Horrible, in fact. It’s the third rail. It is in the prime minister’s self-interest to stay far away from it.

But he didn’t stay away. Which is courageous.

And it’s admirable because there is a good case for change. It’s just not the hyperbole the government is peddling.

Everyone knows that life expectancy has steadily climbed over the decades and is expected to continue climbing. Fewer know that the years of disability-free life we enjoy have climbed along with longevity, and are expected to continue climbing. As a result, the average 65-year-old today is in a very different position than a 65-year-old 40 years ago.

“In the ’60s, if you were a 65-year-old man, you could expect to live to age 78. So 13 more years,” notes Kevin Milligan. “As of 2007, that had increased to 18 years.” That means the value of the OAS pension people receive has steadily climbed.

Think of this another way: In order for the value of OAS benefits to stay constant, they have to be constantly adjusted up-wards to account for inflation. If that isn’t done, the real value declines, which isn’t fair because it results in different generations getting different benefits.

Similarly, the age of eligibility for OAS must be constantly adjusted upwards to account for rising life expectancy. But it hasn’t been. As a result, the value of the pension has in-creased and continues to in-crease – which isn’t fair be-cause it results in different generations getting different benefits.

It also makes no sense for a country whose population is aging steadily. Today, there are four taxpayers for every per-son aged 65 and older. By 2031, there will be two. That means the burden of paying for government services – which will grow substantially thanks to in-creased health care costs – will be shared by fewer people.

Most people can work a little longer. And we need them to work a little longer. It seems a small thing to ask of the healthiest and longest-lived people in human history.

And in asking it, we’d only be doing what most other developed countries are doing. Among the G7 countries, only Canada and Japan haven’t started pushing up the age of retirement. Most started in the 1990s. In the United States, the age at which Americans can get social security has been rising very gradually from 65 to 67 since the 1980s.

The odd thing is that most people know we are living longer and healthier than ever. We say “50 is the new 40” and “60 is the new 50.” We encourage seniors to be more active and engaged. And yet we continue to treat the age of retirement like a sacred totem that must never be moved, rather than what it is: an arbitrary date set in the drastically different circum-stances of the past.

For encouraging us to talk about something that should have been done long ago, at considerable political risk, Stephen Harper deserves praise. But I really wish he would hold the hyperbole.