The C.D. Howe Institute released a study just in time for the recent federal-provincial finance ministers’ meeting, rolling out the tired old argument that as people age they don’t need as much money. If only retirement were so easy.
The study focuses on Canadian public servants’ pension plans in particular – including those of teachers and hospital workers – arguing that indexing them to inflation is too generous. But the study also acknowledges that the broad public system – including the Guaranteed Income Supplement, Old Age Security and the Canada (and Quebec) Pension Plans – appropriately provide benefits fully indexed for inflation because they can fund basic necessities.
So why the double standard on indexing for public system pensions but not public servants’ pensions – and all pensions for that matter?
The study presents an image of Canadians’ inexorable decline into frailty, especially after we reach age 75. It stresses that we need to do our vacation travel while we still have our health because, after age 75, we’ll be too disabled to even go to the movies or dine out. So the study concludes that public sector workers can safely cut their pension contributions significantly by scaling back their plans’ inflation protection.
This is wrong from health and social perspectives, and in its economic analysis.
Of course, as we age we’re more likely to have a disabling condition. But more than half of Canadians aged 65, 75 and even 85 are not so disabled that they do not need a decent income.
Also, expectations for individuals to pay for health and social care are increasing. Hospitals, doctors and drugs in most of Canada are covered by public health programs. But a substantial portion of health and social care costs are not covered. And depending on how much provincial governments cover the growing needs for home care and assisted living, these costs may increase significantly over coming decades.
Most Canadians, given the choice, would rather live at home than in an institution as they age. That costs money. Many could age in place if they had assistance with housekeeping and shopping, for example. But such assistance can be a substantial draw on post-retirement incomes.
Disappointingly, the study makes little or no reference to these realities. And the only Canadian data it shows comes from a highly criticized McKinsey study (which fails the basic scientific canons of openness and replicability), in turn drawing from Statistics Canada data up to only 2008.
So what did the C.D. Howe study conclude from the data?
The study shows the average levels of inflation-adjusted consumption from age 54 to 77 for those with “middle” incomes declining by almost 50 per cent. Seems pretty clear, right?
Except the figures fail to take account of household size. That’s quite an oversight.
Consumption at age 54 is typically for households with two, three or more members, while at age 77, these are households with only one or two members. That’s a major difference. If the study had shown consumption per capita, there would be no such dramatic decline.
If we look at these same C.D. Howe/McKinsey results, this time comparing inflation-adjusted consumption levels of 65 (not 54) year olds to 77 year olds, the decline is only about 10 per cent – not the kind of dramatic drop that would support a frontal attack on inflation indexing of public servants’ pension plans.
Furthermore, the decline in real consumption from age 54 to age 65 is driven not only by declines in household size, but also by people withdrawing from paid work, and the general inadequacy of Canada’s retirement income system to replace their incomes from work with decent pensions.
What we really need – instead of such worn-out arguments against inflation protection based on poor evidence – is a reasoned and evidence-based public discussion of the consumption needs of Canadian seniors, now and projected for coming decades.
Before we can sensibly discuss a wide range of pension policy questions, we’d better have facts based on sound analysis. Unfortunately, the C.D. Howe study misses the mark.
Michael Wolfson is a professor at the Ottawa Centre for Health Law, Policy and Ethics. He holds a Canada Research Chair in population health modeling/populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada and has a PhD in economics from Cambridge.