People walk, run and cycle along the Ottawa River. OAS payments are not linked to wages, and over time, this is gradually reducing the share of preretirement income these benefits replace for new retirees.David Kawai/Reuters
Old Age Security benefits are slowly shrinking as a share of income for Canadians entering retirement, raising concerns about the degree to which future generations of retirees will be financially supported by the government program, according to new research.
A new report from the C.D. Howe Institute estimates that if wages were to grow one percentage point faster than inflation annually, OAS’s ability to replace an individual’s preretirement earnings would decline by more than 22 per cent over 20 years without government intervention.
The problem is that, while OAS payments are adjusted for cost-of-living increases, they are not linked to wages, which generally rise faster than inflation. Over time, this is gradually reducing the share of preretirement income these benefits replace for new retirees. (By contrast, payments from the Canada Pension Plan, or CPP, and Quebec Pension Plan, or QPP, are designed to reflect wage growth over workers’ careers.)
Researchers Pierre-Carl Michaud and David Boisclair warn that this erosion is part of a broader challenge facing Canada’s retirement income system, with retirement benefits and workplace pensions today replacing 10 percentage points less of Canadians’ preretirement earnings than two decades ago.
“OAS is really the backbone of the retirement income system,” said Prof. Michaud, who teaches applied economics at HEC Montréal and is the co-author of the report. “It’s eroding in terms of income replacement.”
The shrinking role of OAS as a source of income replacement is particularly concerning for lower-income Canadians, who tend to rely more heavily on government benefits in retirement, Prof. Michaud said.
The findings come amid a continuing debate over the future of OAS, including whether benefits should be clawed back for wealthier retirees.
The fight over Old Age Security is getting louder
Although Canada’s retirement system has done a good job of helping Canadians preserve their lifestyle in retirement and alleviating poverty among seniors, government benefits and pensions are replacing less and less of what retirees earned while working.
A well-known contributor to that trend is the fact that fewer and fewer working Canadians have employer pensions, particularly in the private sector. In 2023, fewer than 25 per cent of private-sector workers were covered by a registered pension plan, compared with about 35 per cent in 1980, according to the report.
The researchers analyzed Statistics Canada tax data between 2002 and 2022, comparing Canadians’ incomes at age 70 with what they earned in their early 50s. They found that public and private pensions replaced about 48 per cent of Canadians’ preretirement income in 2022, down from 58 per cent in 2002.
Despite these trends, Canadians’ overall retirement incomes have remained relatively stable compared with what they earned before retiring.
After-tax family income replacement rates averaged between 80 per cent and 90 per cent over the period studied, according to the report. As well, seniors’ median net worth more than doubled since 1999, as the value of their homes and retirement savings grew.
The analysis found Canadians are making up for declining pension income in other ways, including by earning more income from work later in life. Dividends from investments and RRSP withdrawals also grew as sources of income replacement.
Prof. Michaud said some Canadians may be choosing to work longer because they want to remain employed, while others may need the income to make ends meet.
But while the report found that retirees have, on average, found ways to maintain their standards of living even while relying less on pensions and retirement benefits, those figures hide a more troubling trend for lower middle-class Canadians. A growing share of those seniors are reaching age 70 with less than 60 per cent of the income they earned before retirement.
To address the gaps in retirement income, the researchers propose a significant overhaul of Canada’s retirement system.
They suggest combining OAS and the Guaranteed Income Supplement, which provides additional financial support to low-income seniors, into a new benefit targeted at lower-income seniors. At the same time, they recommend expanding CPP and QPP to replace more of Canadians’ employment income in retirement.
Under such a system, the new OAS benefit would focus on keeping seniors out of poverty, while CPP and QPP would take on a larger role in helping Canadians maintain their standard of living.