By Pierre-Carl Michaud

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Opinion: Instead of enriching OAS, consider folding it into CPP/QPP Back to video

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The Bloc Québécois has made a 10 per cent increase in Old Age Security (OAS) for those aged 65-74 a condition of its support for the minority Liberal government. It’s not a great idea. As experts have pointed out, this age group has a low rate of poverty already, while the increase would benefit many relatively well-off retirees. It would also represent a significant intergenerational transfer, as Ottawa is running a deficit, which means the increase would be financed through borrowing — a burden that falls disproportionately on the young.

But this obviously political maneuver does raise interesting questions about the future of the retirement system and federal public finances. OAS is Ottawa’s largest single expenditure. With the population’s average age rising, its cost is also rising — rapidly. This is especially burdensome for public finances because the program is funded on a pay-as-you-go basis: taxes collected primarily from today’s workers finance OAS benefits for current retirees.

OAS was introduced in 1952, before the Quebec and Canada Pension Plans (QPP and CPP) existed. Its income-tested complement, the Guaranteed Income Supplement (GIS), was added in 1967. Together the two serve as a safeguard against poverty in old age. All seniors get OAS, up to a certain level of income, while poor seniors also get GIS.

But OAS and GIS are indexed to inflation, while the benefits paid by QPP/CPP and other pension plans depend on career earnings, i.e., wages and salaries, which historically have increased at a rate exceeding inflation.

A decade ago Quebec’s D’Amours committee report calculated that by 2052 OAS could account for only 13 per cent of the median retiree’s labour income, down from 26 per cent in 2012. CPP/QPP will gradually be enhanced in coming years to increase their income replacement rate from 25 to 33 per cent. But that’s not a lot of progress in terms of replacing employment income at retirement through the public system. In 2024, the Mercer CFA Institute Global Pension Index ranked Canada’s retirement system 24th in the world for adequacy.

To strengthen the replacement of work incomes at retirement while easing federal public finances, OAS could be gradually incorporated into CPP/QPP, while maintaining a federal program to support individuals who have worked little during their lives. In both programs, the transfer of OAS benefits to current and future retirees could be achieved through a gradual increase in the CPP/QPP contribution rate. Given the substantial assets of CPP/QPP, any one-time costs could be spread over time to better absorb the demographic transition. This would solidify the foundations of the retirement system in an environment much less exposed to political conditions and public finances.

OAS cannot be completely eliminated. Something has to support individuals who have worked little or not at all during their lives. But this objective could be achieved by expanding the GIS so that, at a minimum, a person gets an income equal to Ottawa’s official “low-income threshold.” This basic income would then be “taxed back” much more quickly than currently as people earned other incomes, including CPP/QPP benefits. Because of this greater targeting, it’s conceivable the cost of such support would be much lower, potentially allowing for a reduction in federal income tax and creating space for federal-provincial dialogue on tax distribution.

The effect on the equilibrium CPP/QPP contribution rate would need to be evaluated carefully, of course, as would the impact of these changes both within and across generations. But eliminating OAS could both solidify our retirement system on a sustainable financial basis and maybe also create an interesting margin for federal-provincial discussions on taxation and public finances.

Pierre-Carl Michaud is Jacques-Parizeau research chair in economic policy at HEC Montréal and the research centre CIRANO.

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