Dan Gardner is the New York Times best-selling author of Risk, Future Babble, Superforecasting (co-authored with Philip E. Tetlock), and How Big Things Get Done (co-authored with Bent Flyvbjerg). His books have been published in 26 countries and 20 languages. Prior to becoming an author, Gardner was an award-winning investigative journalist. More >

A Compromise On Old Age Security

The government insists disaster will befall the nation if Old Age Security costs aren't curtailed. The opposition says that's nonsense and vows to fight any change. Most Canadians have lined up with one side or the other. The trenches are dug. The ammunition stockpiled. We wait for the battle to commence.

Which seems awfully un-Canadian.

This is a country created at a negotiating table, after all. We talk things through. We find mutually acceptable compromises. It's what we do. It's what makes this country great. (And boring. But leave that aside.)

So please join me under the white flag in No Man's Land. I may have a solution.

Let me begin by clearing up some confusion. We are not dealing with one cost, as many people seem to think. We are dealing with two.

The first cost is the amount the government pays out in Old Age Security cheques. As the baby boom slowly advances past the magic age of 65, it will rise significantly. About that, there's no dispute.

What is disputed is how big that cost will be. The government likes to cite an eye-popping $108 billion figure, which is what Canada's chief actuary says the annual cost will be in 20 years. So is the government right to claim that this threatens to sink the federal government and turn Canada into Greece?

No. What the government doesn't say is that the $108 billion figure factors in 20 years of inflation. And it does not account for 20 years of economic growth. Which is why the better measure is the cost of the program relative to the size of the economy. The chief actuary says that will rise from roughly 2.4 per cent of GDP today to 3.1 per cent. Which is significant, but we can manage it - as the Parliamentary Budget Officer and lots of independent experts have confirmed.

What's that? Cheering from the opposition trenches? Quiet down, people. You've forgotten the second cost I mentioned.

It's the broader toll of population aging.

The biggest part of that bill will come from health-care costs, which are expected to rise at a frightening pace. The federal government has insulated itself from this trend by arbitrarily cutting and capping its future funding growth but that doesn't solve the problem. It only pushes it onto the provinces. And how are provinces going to deal with it? At least in part by boosting the burden on taxpayers.

And surprise! Thanks to population aging, the number of workers per retiree will shrink rapidly, and since retirees generally make less money and pay less income tax, governments will have to squeeze more money out of fewer people. Or slash services severely. Or some combination of the two.

The opposition knows all this. It was the central theme of a Liberal policy conference in 2010.

So let's not get bogged down in who's right and who's wrong. Both are right. And both are wrong.

Let's get to the negotiation. The government's bottom line is that we have to make changes that reduce the impact of population aging. The opposition's bottom line is those changes cannot include cuts to Old Age Security, now or in the future. Is there a mutually satisfying compromise? There is.

It goes by the wickedly sexy name of "actuarial adjustment."

With any pension, actuaries are able to look at life expectancy and determine the total value of the pension over the years it is expected to be paid out. If someone wants to start collecting the pension a few years earlier than normal, the monthly payment is "actuarially adjusted" - meaning it is reduced enough to ensure that the total value of the pension remains the same. In effect, the pension is stretched across more time.

Pensions can also be compressed: If you delay receiving the pension for several years, the size of the monthly payment will increase to ensure, again, that the total value of the pension remains the same.

Lots of private pensions do this in one form or another. So does the CPP.

We could do the same with OAS.

With an actuarially adjusted OAS, you could collect the regular benefit starting at age 65. Nothing would change.

Or you could forgo the OAS at 65 and keep working. You could start taking the OAS at 66. Or 67. Or 70. And the size of your monthly cheque would be increased accordingly.

We could also do the same in the other direction: Let people start collecting OAS at 64 or 63 or 62. But reduce the size of the payments accordingly.

Done properly, this will neither increase nor decrease the total cost of OAS to the government.

But it will create a positive incentive for workers who can keep working, and want to keep working, to do so. And that would mitigate the impact of population aging.

This approach "steps aside from the whole issue of what the retirement age is," says University of British Columbia economist Kevin Milligan. There won't be "a" retirement age. There will be a range of choices which people are free to make according to their own circumstances.

For the record, this isn't my idea. I pinched it from Milligan. And Milligan credits economist Jack Mintz.

Milligan also notes that the United Kingdom introduced this system in 2005. It was a Labour government that brought it in. Which makes sense. Unions are very familiar with actuarial adjustment because they routinely negotiate pensions. "Actuarial adjustment" may be new to the OAS debate but there's really nothing novel about it.

So there it is. Take it back to your respective trenches and talk it over like the good Canadians you are.