Generational fairness and Old Age Security

Generational fairness and Old Age Security

By Michael Wolfson : What is generational fairness anyway?

The last time Canada’s Parliament seriously grappled with this question was during the Special Parliamentary Committee on Pension Reform in 1983. Yes, there have been ad hoc increases to the Guaranteed Income Supplement (GIS) since then; the Old Age Security (OAS) claw back was introduced in 1989; and there was a significant increase in Canada (and Quebec) Pension Plan (C/QPP) contribution rates in the mid 1990s. But all of these changes were piecemeal – none addressed Canada’s public pension system as a whole.

Fairness is fundamental to sustainability

In contrast, the Special Parliamentary Committee in 1983, made up of dedicated back bench members from all three of the parties then represented in Parliament, devoted a full year to hearing witnesses, holding extensive in camera discussion and debate, and eventually produced an entire chapter on “Intergenerational Fairness.”

As a policy analyst working with the research staff of this Committee, it was a wonderful experience to hear and help inform these discussions. While the members brought their own diverse political perspectives, the discussions were polite, engaged and thoughtful. All members recognized that intergenerational fairness was fundamental to the long term sustainability of public pension programs. It was also clear to all that pension arrangements necessarily involve inter-generation transfers.

It is a fiction to believe that any public pension arrangement can be financed purely by each generation setting aside the funds for its own future benefits.

Many think of their RRSPs as a pure example of each person providing for their own retirement income. But this ignores the important income tax incentives in place to encourage RRSP savings. And we cannot simply apply the analogy of individual saving for retirement to society as a whole. For example, higher payroll taxes today to fund future pension payouts from the C/QPP will have broader impacts on the economy (possibly discouraging small businesses in hiring, and more generally reducing consumers’ overall purchasing power, hence aggregate demand).

The Committee therefore chose to ground its thinking in basic principles. A clear majority of Canadians of all ages and all socio-economic backgrounds had to be comfortable that one generation or group was not taking advantage of any other, for example by creating a huge burden on their children. Another general principle was that one generation should not be promising itself a pension in the future that was better than what it was prepared to provide to the elderly while it was in its working age years.

As the Committee grappled with these different principles, a key question was how they should be operationalized in practical and understandable legislation. In the end, the Committee unanimously agreed to recommend a change in the way public pension arrangements were indexed. A breakthrough moment during in-camera discussions revolved on whether pensions should ever actually decrease from one year to the next.

The metaphor that clinched the Committee’s agreement was that of a 19th century rural extended family. All members agreed that in “fat years,” when harvests were abundant, everyone should share in the bounty, including those around the table who were too old and frail to have contributed much to the actual farm work. But in “lean years,” when there was not so much to go around, everyone should also share in the necessary belt-tightening.

Based on this shared understanding of intergenerational fairness, the Committee’s recommendation was for an indexing system that took account of the ratio of people age 65+ to those of working age, the unemployment rate, and whether overall economic growth – after taking account of inflation – was weak or strong.

Stop fanning the flames of conflict

When these factors were favourable, indexing would be more than the inflation rate. And when factors were not favourable, indexing would be less. This indexing would be applied not only to OAS and GIS, and to C/QPP, but also to other parts of the retirement income system like the tax limits for RRSPs and workplace pensions.

Wouldn’t it be wonderful if Diane Finley, Minister of Human Resources and Skills Development in her latest comments on OAS to the Canadian public, could avoid fanning the flames of inter-generational conflict, and instead point Canadians to a more thoughtful and fuller discussion of the real issues involved in assuring an inter-generationally fair public pension system?

Only then, can the real discussion begin.

Michael Wolfson is an expert advisor with EvidenceNetwork.ca, and Canada Research Chair in Population Health Modeling/Populomics at the University of Ottawa. He is a former Assistant Chief Statistician at Statistics Canada, and spent several periods during his career in the Federal Public Service developing and advising on pension policy.

Michael Wolfson : Expert Advisor

EvidenceNetwork.ca

www.troymedia.com