Proceedings of the Standing Senate Committee on
Aging
Issue 4 - Evidence - Meeting of February 11, 2008
OTTAWA, Monday, February 11, 2008
The Special Senate Committee on Aging met this day at 12:36 p.m. to examine and report upon the implications of an aging society in Canada.
Senator Sharon Carstairs (Chair) in the chair.
[English]
The Chair: Good afternoon. Additional senators will be joining us. There are significant travel problems across the country, with delayed flights and so forth. However, we do not want to hold up the panel any longer.
This afternoon, we have with us Garnett Picot, Director General, Socio-Economic and Business Analysis, Statistics Canada, and he will be our first speaker. Also at our table today is René Morissette, Assistant Director, Research Business and Labour Market Analysis Division, Statistics Canada; Ted Wannell, Assistant Director, Labour and Household Analysis Division, Statistics Canada; and John Myles, Canada Research Chair and Professor of Sociology, University of Toronto.
Welcome to all of you. We have been engaged in the Special Senate Committee on Aging, examining the implications of an aging society in Canada. Today, we hope to focus on retirement and income issues, and so we will with Mr. Picot.
Garnett Picot, Director General, Socio-Economic and Business Analysis, Statistics Canada: Mr. Morissette and I will make this presentation jointly. We will start with the wealth and income position of the retirement and pre-retirement population. Briefly, we will talk about the extent to which income levels and replacement rates are maintained as people age up to age 75; what is the difference between those who start with high earnings and those who start with low earnings, and how are more recent retirement cohorts faring, compared to earlier groups of retirees. Then, René Morissette will talk about the wealth position of older Canadians over the last 15 to 20 years.
By replacement rate we mean the family income of someone at say age 75, relative to their family income at age 55. If their income was exactly the same at 75 as at 55 the replacement rate would be one. If it was 15 per cent lower, the replacement rate would be 0.85. We are using family income as a concept here because we are interested in the welfare of these individuals.
For data reasons, we excluded people earning less than $10,000 at age 55. We do not include the very poor here. We do not have people with very low earnings. The way to think about this research is, we are focusing on the levels of income and the levels of income replacement for people who had a significant attachment to the labour force at age 55; that is, they earned more than $10,000.
The reason we decided to proceed with this study in spite of that shortfall was because we know the pension system has been fairly effective in poverty reduction and poverty prevention, by and large, but we do not know much about income maintenance of the extent to which we maintain pre-retirement lifestyles, so that is what we are focusing on.
Page 4 shows income levels as people age from age 55 to age 75 across the bottom of the chart, and the red line is the income levels of people who were age 55 in 1983. That is our cohort. You can see that income levels remain flat up to about age 60 or 61 for the top quintile. This group is the richest 20 per cent of individuals. If we focus on what happens to them during their 70s, you can see that their income falls by about 15 per cent. If look at the people who are at the top of the income distribution when they move into retirement, the red line, their income falls by about 15 per cent by the time they are in their 70s.
If we look at the average, which is the black line in the middle, income falls about 10 per cent, and if we look at the bottom quintile, that is, poorest 20 per cent in our sample, their family income does not change as they move from age 55 to 75.
It does not change because Old Age Security, the Guaranteed Income Supplement and Canada Pension Plan replace earnings. Page 5 tells us, by age 65 and 75, what the sources of income are: people at the top of the earnings income distribution at age 55 and the bottom. For the bottom quintile, as you would expect, by age 75, 60 per cent of their income is OAS, GIS and CPP. That is where their income comes from.
In the top quintile, 40 per cent of their income is from private pensions. Investment and capital gains also plays a major role. About two-thirds of their income come from those two sources. You can see the differences in income sources across the income distribution.
Page 6 shows the replacement rates I spoke about earlier. The replacement rate among the bottom quintile is the blue line at the top. If you focus on the period during the 1970s, which is the right-hand side — again these people were age 55 in 1983 — replacement rate at age 55 by definition is one, and by the time they are in their 70s, it is about one as well.
Because OAS, GIS and CPP replace earnings, income replacement rates remain at about one for this population. The median income replacement rate is about 0.8. If you want to describe the population with one single number, you would probably go to the median and see an income replacement rate of about 0.8. For the people at the top, replacement rates are 0.75 to 0.8.
These replacement rates are fairly high. Not everyone has these levels of replacement rates. About 20 per cent of the population has a replacement rate below 0.6, so some people have much lower replacement rates. If you take a look at the people in the middle of the income distribution and take a population that has basically the same income at age 55, some of them will have high income replacement rates and some will have low income replacement rates. What makes the difference? We concluded that early in the retirement years, it is mainly earnings. Those who maintain high income replacement rates have more earnings, either by themselves or with another family member. By the time they are in the 70s, it is whether they have a private pension, and investment and capital gains that distinguish high from low replacement rates.
Finally, what has happened to these replacements rates for more recent cohorts? We are now at page 8. You can see on the left-hand slide these are different cohorts. The bottom cohort, the blue one, was age 55 in 1983; the red line at the top was age 55 in 1998. You can see that the income levels are rising for the more recent people entering retirement. More recent cohorts have better incomes as they enter retirement on average than earlier cohorts for two reasons — their earnings have increased and they have more income from private pensions.
Because replacement rates are income at some age, say 70 compared to 55, earnings have risen for these more recent cohorts both at age 55 and in older years; so their income replacement rates have remained about the same. The rates have not really changed much over the last few years.
I will stop there, and Mr. Morissette will tell us about what is happening to the wealth position of these populations.
René Morissette, Assistant Director, Research Business and Labour Market Analysis Division, Statistics Canada: On page 8, we see in the left chart the median wealth of Canadians by age group excluding registered pension plans, RPPs, and the value of pension plans. Median wealth grows significantly among families headed by someone 55 and over, but they do not rise as much among the younger ones. That line is the one on the left. For data reasons, when we go back to 1984, we exclude the value of pension plans.
On the right side now, we present other wealth estimates that include the value of pension plans, and this data is available for the 1999-2005 period. Among people 55, 64, and 65 and over, there is a significant increase in wealth over the past few years.
On the next page, if we focus on retirees, people 65 and over, we see that this growth in wealth has not been uniform across segments of the wealth distribution. Specifically, median wealth grew sharply for those in the top 20 per cent of the wealth distribution. It grew also for those in the middle of the wealth distribution but stagnated over the past 20 years or so for those in the bottom 20 per cent. Growth patterns are not uniform across the wealth distribution. This pattern is also observed among the near retirees, that is, those aged 55 to 64.
On page 10, we examined the extent to which this increase in wealth has been driven by the recent increases in housing prices. That chart shows that, among the 65 plus, much of the wealth growth in the middle and top quintile was driven by increases in housing wealth. The estimates of wealth that include housing wealth and business equity are represented by the blue bars. If we exclude housing wealth and business equity, represented by the yellow bars, we see that for the middle and top quintile, a good chunk of the growth was driven by increases in housing wealth; that is, housing prices.
So far, we have focused on the wealth position of the retirees or near retirees. On page 11, we look at the younger cohorts. Specifically, we look at the pension coverage of young men over the past 20 years. This chart shows that the pension coverage of recent cohorts of young men has fallen relative to pension coverage of previous cohorts, those in the mid-1980s.
For example, the blue line shows the pension coverage of the cohort age 25-29 in 1986, that is, these people entered the labour market at age 25-29 with pension coverage of about 23 per cent. That pension coverage rose over time. The red lines show the corresponding pension coverage for the 1996 cohort which, instead of being at 23 per cent, is around 17 per cent, a drop of about 5 or 6 percentage points. Ten years later, that 1996 cohort had not converged completely to the coverage rate of the previous cohort, the 1986 cohort. We see evidence of a downward shift in the pension coverage profile of young men.
To summarize, on page 12, among persons with some labour force attachment, as Mr. Picot mentioned, family income replacement rates vary across income distribution. The median replacement rate is around 0.75 to 0.80. If we focus on the replacement rate for those at the bottom of the income distribution, this rate is close to one, thanks mainly to the effect of public pensions. The replacement rates in the top 20 per cent are lower. About 20 per cent of families have replacement rates below 0.60.
If we look at the middle quintile of family income distribution, one quarter of families have replacement rates below 0.6. What distinguishes these families from their counterparts with higher replacement rates is earnings early in retirement — they receive relatively a lot of earnings — and private pensions later in retirement; that is, they receive a relatively large amount of private pensions later.
The more recent retirement cohorts have higher income levels than their predecessors. They have done fairly well and have similar replacements rates, but if we focus on younger cohorts, we notice that the private pension coverage has been falling among young workers.
In conclusion, retirees have generally fared well over the past 15 to 20 years. They have seen income levels and wealth holdings rise relative to previous cohorts. Among younger age groups, we have seen a stagnation of wealth holdings and a decline in pension coverage. Among these workers, there might be cause for concern.
The Chair: Thank you very much. I forgot introduce Maxime Fougère, Assistant Director, Labour Market Research and Forecasting. Welcome.
Ted Wannell, Assistant Director, Labour and Household Analysis Division, Statistics Canada: If we go to the second presentation on public pensions and work, the idea behind this study is that if we think of a world where there are no public pensions or employer pension plans, then individuals would save for their retirement over their life course. As they become older, they would decide whether they want to retire and whether they have the resources to retire and have more leisure. We would have a smooth transition over a number of years out of the labour market as people age.
We know in reality that most people's savings and wealth is locked up in public and employer pension plans, and they tend to have features that concentrate the transition out of the labour market at specific points in time or at specific ages.
The main thing I want to talk about is the Canada Pension Plan. As you know, in 1987, the CPP changed from straight eligibility for benefits at age 65 and added more choice, where individuals can choose to retire anywhere between age 60 and age 70. At age 60, there is a 30-per-cent penalty relative to retirement at age 65, and a premium of up to 30 per cent for retirement up to age 70.
On the next page, the data here is what we call the Longitudinal Administrative Databank, LAD. It is based on tax files. The sample is of 20 per cent of tax records. We follow individuals over time, and they are linked within families so we can look at the family picture for individuals.
For this study, I have taken three-year panels at different points in time. We identified people between the ages of 59 and 69 who had employment earnings in the first year of the panel. They had the opportunity to transition and take CPP in the second year or not. In the third year, we can see whether they continued working, through the presence of earnings in the third year.
On the first chart, I want to look at the age pattern of take-up of CPP, now that people have the choice. The most recent data is for 2003 because the file that I had available at that time went up to 2004, but we are looking here at the transition year.
The bottom line in that chart is the take-up rate for Canada Pension Plan benefits at individual years of age. You can see that about 38 per cent take up CPP benefits as soon as they are eligible, at age 60. The yearly probability or take-up rate drops through the early 60s and then we see a big spike at age 65 where almost 80 per cent of the people who have not taken their benefits at that point will take them at that time. Then, the rate drops back down again later.
The second line, the higher one on that chart, is the cumulative take-up rate: the percentage of a cohort that has taken up the benefits by a particular age.
We can see that over 95 per cent of a cohort will take their benefits by the age of 66. The other interesting thing to note is that, by the time they reach age 64, about two thirds have already taken their CPP benefits. Even though we see that big spike at age 65, on the next page we can see that, in terms of absolute numbers, more than twice as many people take their benefits at age 60 than those who take them at age 65. That is where the real mode is in terms of the greatest number of people taking up their benefits.
On the next slide, we take a quick look at the trend over the past eight years. Generally, we see an increase in the take-up rate at age 60. It is more pronounced among women than men. Among women, in only eight years it went from about 31 per cent to almost 38 per cent. It is rising rapidly among women and rising, but not so rapidly, among men.
The nice thing we can do with the LAD is to look at things that have happened before that might influence people to take their CPP early. The most important factor we look at is whether people have private pension benefits they have started before age 60. That factor makes a huge difference in the take-up rate.
Looking at the top two lines on the chart, individuals who received private pension plan payments at age 59 without any earnings, 80 per cent of them took their CPP as soon as they were eligible, at age 60.
If they combined those private pension benefits with some earnings, the take-up rate was about 60 per cent. The rate drops considerably for people who are working still at the age of 59 and are either eligible for an employer pension plan or are not.
There is an interesting anomaly here. The people who are working still at the age of 59 and have an employer pension plan at that time have a lower take-up rate at the age of 60. I think there might be a selection effect, where people who have private pensions and have the long service that they are eligible for high benefits have already left, and those remaining are less likely to take their CPP at age 60 than those who do not have an employer pension plan.
If we look at the third year for each cohort, and the people who work after they take their CPP benefits, and compare them to people who did not take their CPP benefits, we know from the labour force survey and other sources of information on the labour market, that participation rates among the older age groups as well as the size of those groups are increasing.
We see here that the participation rate in paid work is going up for the people at the top line who did not take their CPP in the middle year. These people are 60-somethings who are working without the benefit of CPP. The rate is much lower for people who have already taken their CPP, but it is increasing more quickly. We have tension between the phenomenon of people taking their CPP benefits earlier and earlier, and more people continuing to work after they take their benefits.
If we look at who among the CPP beneficiaries are most likely to work, it is those who were not eligible for RPP benefits with their last job. A need factor is involved. People who do not have RPP benefits are more likely to continue working.
We dropped people from this chart who only had RPP benefits at age 59 because it would take the numbers down, and we would not see as much movement in the chart. Even among that group, the incidence of work has almost doubled after take-up of their benefits. Therefore, they were not working at all at age 59; they were receiving RPP benefits. Earlier in the period, 1995, 5 per cent of those folks were working at age 61, and now it is up to 10 per cent. Even among that group, we see a sharp rise in post-benefit work.
The next chart shows different earnings levels for working beneficiaries of the CPP. It is interesting to see that the greatest increases are in jobs earning more than $20,000, referred to as real jobs rather than casual work. It is not a pickup in casual labour.
I conducted an earlier study of people who took up RPPs in their 50s. Over the same time period, you see some increase in work among that group, but most work is concentrated in the lower category; work less than $5,000 a year. There is a difference in the group in their 50s. The trend is towards more casual work. Among 60-somethings, the trend seems to be towards more substantial work.
The last couple of slides take a quick peek at people in the 65 to 69 age range. The interest here is the effect of GIS benefits. You will hear from Mr. Shillington about the work-disincentive effects.
I wanted to look at work among 65 to 69-year-olds who receive the GIS as opposed to CPP and OAS. In both men and women, we see a much lower rate of work among GIS recipients, perhaps as a function of the high claw-back rates. In this group, they are about three times less likely to work if they receive GIS in combination with OAS and CPP, compared to people who receive only CPP and OAS.
We can make the argument that if people receive GIS, they likely had an intermittent work history or some kind of work problems coming into the pre-retirement period or they would not be eligible for GIS.
We see in that slide that about 50 per cent fewer GIS recipients were working at age 64, compared to people receiving CPP and OAS without the GIS.
We can do a back-of-the-envelope calculation and say that of the people working at age 64 there is still 50 per cent fewer who would be working who are receiving the GIS, as compared to the CPP and OAS types.
Coming back to the summary slide, we see that there is a trend to take the benefits at age 60, especially among women. The take-up rates at age 60 are highest for those already collecting RPP benefits, but lowest for those working in an RPP-covered job. It is likely a selection effect.
The incidence of work after receiving CPP benefits: The main trend is growth in substantial jobs where they earn more than $20,000 in the course of a year. That group is increasing the fastest. Participation is rising rapidly among those who retired from jobs without RPP coverage. There is some evidence there might be financial need for this increased work.
GIS recipients are less likely to work, even after accounting for recent work experience.
Maxime Fougère, Assistant Director, Labour Market Research and Forecasting, Human Resources and Social Development Canada: Most of my talk will be based on a preliminary version of a paper on early retirement incentives in Canada's pension plans that I presented last October at the John Deutsche Institute.
As you are aware, population aging may pose significant labour-market challenges in Canada. Encouraging older workers to remain in the labour force longer is an option that a number of organizations — like the C.D. Howe Institute — have recommended. It is generally acknowledged that early retirement incentives in Canada's public pension are small compared to other countries in the Organisation for Economic Co-operation and Development, OECD. Some people have suggested early retirement incentives could be reduced.
There is also evidence that private pension plans also generate early retirement incentives, as early as before age 60. Work done a few years ago at Finance Canada showed us that evidence.
The primary goal of Canada's retirement income system is to enable a reasonable level of income and retirement for all seniors. Another goal is to prevent a decline in standard of living upon retirement. Another consideration involves the system's effects on retirement decisions, and therefore on issues of labour-force participation, older workers and even the contribution to productive capacity.
Last October, we presented a paper on early retirement incentives in Canada's public and private pension system at a conference organized by the John Deutsche Institute. Our prime objective was to quantify the impact of early retirement incentives in both public and private pension plans on Canada's labour force participation, on productive capacity — in the model we measure as real GDP per capita — and also on a measure of economic welfare. We also examined hypothetical scenarios to reduce our retirement incentives in Canada's public pension system.
In our analysis, we use a life-cycle economic model, which takes into account both the structure of the Canadian economy and also the context of an aging population.
According to our analysis, what are early retirement incentives in Canada's retirement income system? To provide a bit of theory, I would say the literature deconstructs incentives from defined benefit pension plans into two effects, and one is the wealth effect. As we accumulate more wealth, that wealth encourages individuals to work less and to have more leisure time, eventually leading to retirement, especially as we become older and develop preferences for leisure.
That effect is present in all kinds of financial assets; the defined benefit, defined contribution, RRSPs and other financial assets. It is the normal effect.
Another effect is present on defined benefit pension plans. It is an accrual or substitution effect.
This effect is a difference in your pension wealth between retiring at some date in the future and pension wealth if one retires now. An individual has an incentive to retire if continuing to work does not increase their pension wealth. This effect is present in most defined benefits plans after certain years of work, depending on the benefit plan and the rules of those plans.
In this context, we estimated early retirement incentives using a well-known method in the economic literature: We estimated in a form of an implicit tax rate on working or leisure. It is standard in the literature. We estimated for both public and private pension plans. We used these measures afterwards and we simulated the long-term economic and labour-market impact with our life-cycle model.
In our key findings for public pensions, we find that, before the age of 60, the public pension system generates net incentive to work because, if they continue to work, their future CPP benefit will be increased, so the effect is a positive one.
We find early retirement incentives mainly between the ages of 60 to 64. As the literature suggests, in the Canadian system, the interaction between the CPP and the GIS is one element. Another element is the GIS benefit reduction or the clawback. Also, the actuarial adjustment in the Canada Pension Plan would appear to be too small to compensate for loss of a pension income year. Although we did not measure this effect in our model, another effect that must be considered is the work cessation test, which is also an impediment for labour force participation.
After 65, we find that there is still incentive for retirement, mainly from the GIS, and it mostly influences low- income individuals. Also, the OAS clawback for high-income individuals generates incentives for retirement.
When we simulate these effects using our model, and eliminate the early retirement incentives, we can look at the economic impact in terms of increased labour supply, the impact on the economy and so forth. We find a small positive impact on labour supply or on the participation rate of all the workers, and of course, a small positive impact on real GDP per capita. Since these people work more, they also contribute to more production output and a small increase in economic welfare. It is in the order of less than 1 per cent of GDP. It is not negligible, but small. The increase in participation would come mainly from lower-income to middle-income workers. For high-income individuals, there is no incentive.
When we look at private pension plans, the results are different. As you know, in defined benefit private pension plans, there is not one single plan. There are thousands. We needed to find a way to model those plans to have a representative agent. Using information from Statistics Canada, we created a typical defined benefit, DB, plan based on information we had. We find, in aggregate, that early retirement incentive begins as early as age 55 and increases with age and level of income. Comparing these measures with those of public pension plans, we find they are several times larger than early retirement incentives in public pension plans.
When we examine the economic impact of eliminating those early retirement incentives, we find a large positive effect on labour supply, and also on GDP per capita and welfare. To give you a sense of comparison, the impact on real GDP per capita would be about seven times larger than the effect of eliminating early retirement incentives from public pensions. The increase in participation rate comes from all income levels, so not only low and middle incomes are participating but also high incomes. Because people in higher income levels participate more in DB plans, they are more influenced by elimination in early retirement incentives.
In conclusion, we estimated in this paper that the cost of early retirement associated with public pension plans would be relatively small, and could represent less than 1 per cent of GDP. There are more early retirement incentives in defined benefit private pension plans, possibly as much as seven times larger.
Our analysis of the private pension plans is based on the current structure of DB pension plans. It is possible that, in the future, employers will adjust, given the changing context. Work by the Conference Board of Canada suggests that employers use the DB plan as a way to manage the work force, and they could use it to retain older workers, if necessary. This situation is the current one, but it may change. I suspect DB plans will change more in the future to lower these incentives if employers feel pressure from their workforce.
We also examined hypothetical policy scenarios to make the public pension system near incentive neutral to retirement decision. Again, consistent with our other findings, we find small gains, depending on the scenarios.
The Chair: Thank you very much. All the presentations were extremely informative.
Let me begin with page 9 of the brief from Mr. Morissette, Mr. Picot and Professor Myles. I am concerned about the fact that the bottom has stagnated so much. What do you attribute that stagnation to? I assume it is partly because there has been no significant increase in either the old age pension or guaranteed income supplement. However, maybe that assumption is not correct and you have other explanations for why there is such stagnation at that lower quadrant.
Mr. Morissette: We have not looked at that item specifically, but one possibility is that the one source of growing income among the retirees over time was the better pension coverage in terms of private registered pension plans, RPPs. I suspect, at the bottom, we might have employees who, during their career, were not covered by pension plans and did not benefit from the growing pension coverage that took place during the 1960s and 1970s. That is one potential explanation. I do not know if Mr. Myles could add other elements.
John Myles, Canada Research Chair and Professor of Sociology, University of Toronto, as an individual: I do not have the chart in front of me, but I suspect the explanation relates to changing patterns both in earnings in Canada over the last 30 years and in wealth accumulation, where the bottom part of the earnings distribution has seen earnings stagnate, and most of the growth has been towards the top. That chart largely replicates other large long-term trends in earnings patterns that we see in Canada and in the accumulation of private wealth, rather than some GIS-OAS story.
The Chair: In your discussion of wealth, you mentioned that much of this increase has to do with housing wealth. There is a wonderful myth in Canada, and around the world until sub primes in the United States, that housing always increases. As an historian, I know that, in the United Kingdom, housing prices did not increase for 150 years. Then they escalated dramatically, but 150 years was the lifespan of three people. What is the impact on Canadians of the fact that all this wealth is in housing? I assume some of you live in Ottawa. There was a rather startling chart in the newspaper on the weekend about the high rates of taxes, particularly in the areas of the city in which the housing prices have increased the most. One questions, to some degree, whether that increase means that people must leave this expensive housing they are in because they cannot afford the upkeep or the maintenance of the same housing.
Mr. Morissette: That is a good question. To put things in context, one big chunk of the rise was in housing but another big chunk of the rise in wealth was in two sources; RSPs and financial assets, stocks and bonds.
Now, as to the impact on the ability to consume or the living standard — maybe that is your question — it depends on what people do as they become older. To what extent do they sell their house, or downsize in terms of housing, and what kind of prices do they receive for that housing? It is hard to predict how these things will evolve over time.
The Chair: One area we are looking at is the concept of seniors aging in place, which means they potentially remain in their own home and are not forced to go elsewhere. That is why I was going down that particular alleyway, if you will.
Senator Mercer: It reminds me why I should have made paid more attention in statistics class. You first stated that you excluded the individuals with income below $10,000. Of course, this committee is studying poverty, and we can assume that those people are a big part of our audience for the study.
Why did you exclude them and what led to that decision? That might give us insight into some of the things we would like to know.
Mr. Picot: We excluded them because the data set we were dealing with did not have sufficient data on that population. We used tax filers and, early in the study, prior to 1992, people with earnings below $10,000 simply did not report a lot of income so we did not have accurate income data on people below $10,000. We did not exclude them because we wanted to; we had no choice.
There are many major issues, but we can think about low income or poverty as the first issue among retirement and the extent to which public and private pension systems prevent people from falling into poverty. The second issue is, what happens in the rest of the population? How are their levels of income maintained? We hear about the baby boomers not being ready for retirement, and the replacement rates will be low, et cetera. We studied the second issues, not the first issue because this study is not a poverty analysis. This study is an analysis of a second issue and that is, to what extent do we see incomes being maintained as people age, especially those people in the middle and top of the income distribution. Overall, we conclude that, by and large, the numbers suggested that people entering retirement are doing pretty well.
Senator Mercer: On page 5, your chart shows a maximum of 40 per cent of people receiving income from private pensions. That group is the top one, and the chart says down to a low of 15 per cent in the bottom group.
This number is a major concern for me. Later, on page 12, you talk about private pension coverage falling among younger workers. You say that the situation is not getting better but it looks like it is getting worse. The government can do so much by providing CPP and Old Age Pension, et cetera. However, for people who are not supplementing those sources of income with private pensions, will that problem become much worse as that population of people retire, their incomes drop potentially and they become a greater financial burden on the rest of the population?
Mr. Picot: It is possible.
Again, we look at these results as fairly positive for people who have recently retired and for people who will retire in the near future. I will divide this group into people who will retire over the next 10 or 15 years and then people who will retire beyond that time.
In the next 10 or 15 years, it seems to me a number of positive things will happen. Labour demands will probably rise. A lot of people are entering retirement. We are worried about labour shortages, so the opportunities for people to work once they are into retirement and in early retirement will increase. This generation of retirees may be one of the first ones to be wanted in the sense that the unemployment rate is low. Through the 1970s, 1980s and 1990s we had a surplus of labour. We had relatively high unemployment rates. We will now enter a period where we will probably have the opposite. The opportunity for retirees to find jobs in the near future will be high.
The education attainment of people is changing dramatically. I forget the exact numbers, but in 1990, for people aged 55 to 64, about 25 per cent or 30 per cent had some level of post-secondary education; a degree, certificate or diploma. Now it is something like 54 per cent. It has risen dramatically. The population is much more highly educated. They tend to want to work longer. The opportunities will also be there. Earnings have been rising among the older population for the last couple of years as compared to the young, where it has been falling. Things are looking good for people who are retiring in 10 or 15 years.
Beyond that, when we look at people now under age 40, we run into the problems you identified, and that is, earnings have been falling among that population relative to the earnings of their predecessors, and pension coverage has been falling. As we look farther out, those generations may face additional problems that we do not see now and will not see in the near future.
Senator Mercer: Labour shortages are becoming a problem. Our unemployment rate is at a low level and, having lived most of my life in Halifax, I thought I would never see the day when I could see help-wanted signs all over the city.
One solution to our labour shortages is immigration. Have you conducted an analysis of new Canadians as they come into the workforce? Are they bigger participants in private pensions? Do they come into the workforce and join the CPP program at an older age? My son started working at age 20 so he started to contribute at age 20, but are new Canadians coming in at an older age and contributing fewer funds to the plan, and are these Canadians greater or lesser contributors to private pension funds?
Mr. Picot: You are probably aware of this finding as a committee. Immigrants, in general, over the last 15 or 20 years, by and large when entering Canada, are not doing well economically, and the situation has been deteriorating.
In general, in terms of earnings, they are worse off than their predecessors were; immigrants entering during the 1970s. They have lower earnings.
An increasing number of immigrants are entering in their 40s, which means they do not have as much time to acquire wealth or to contribute to pension plans, et cetera. Most immigrants are still young but an increasing number are in their 40s. When those two facts are combined, the immigrant population may be one area where we see issues regarding retirement in the coming years, and income maintenance or adequate income levels.
That is a general answer.
Mr. Morissette: Given that the earnings of recent immigrants have deteriorated, and generally we know highway jobs are well covered by pension plans, I suspect that we might see the kind of decline in private pension coverage that we have seen among the young workers, the young men. I suspect we would see that also among the recent immigrants. We completed a study on that issue a few years ago, but I do not recall the numbers.
One issue related to pension coverage that we examined among recent immigrants was the extent of their knowledge about their pension coverage; that is, we asked people whether they had a pension plan in their job or not. Then we turned to their employers and asked them whether they provided any kind of pension plans. We found that, among recent immigrants, much more so than among the Canadian-born population, knowledge of pension coverage was poor; that is, a high proportion of recent immigrants claimed they had some sort of registered pension plan or group registered savings plan in their job but, in turning to their employers, found they had no plan at all. There might be a knowledge issue among recent immigrants. They may think they are covered by a private pension plan — perhaps they think that CPP is a private pension plan — which would confound the problem.
We were not able to look at whether this misinformation had implications for their savings behaviour, that is, whether thinking they were covered by some kind of pension plan led them to save less than they should have otherwise. To summarize and to go back to the initial question, my sense is — we can check — that the recent immigrants have not done better in terms of pension coverage than new Canadian-born entrants over the past few years.
Senator Mercer: Mr. Wannell, in your presentation you talked about excluding disabled and single-year RPP payout from this study. I think I understand the single year, but I do not understand excluding disabled. That group would be one that would be probably worthwhile to study.
Mr. Wannell: It would be definitely of interest for social policy, but in terms of looking at post-take-up work patterns, they would be limited generally from seeking work because they have recognized disabilities.
Senator Mercer: Have studies been done to examine the new theory or discussion about income splitting? We are in a situation where a couple together arrive at a point where one person wants or needs to retire and the other person wants or needs to continue working. However, because income will drop, perhaps the person that is working would like to draw on their CPP to supplement the family income but cannot because they are still working. Have any studies been undertaken to examine what effect that situation would have both on the fund and on incomes if it were to change; if people who are working and are above the age of 60 are able to receive CPP as a supplement to the family income? Most people look at their family income as opposed to their personal income.
Mr. Wannell: We do not have anything in particular on that subject. Mr. Fougère talked about the stop-work effect. To collect the CPP benefits, one must stop working for one month, and then one can start again. It is not a prohibition on work and receiving benefits; it is stopping work for one month. The idea is that it is a real impediment to work, and for an increasing number of people, we see it is not a big impediment.
Senator Keon: I have always found pensions interesting. For one thing, in my life as an administrator, pensions present a tremendous problem for people that reach age 55, approximately, because when they calculate their incomes and so forth, there is not much value for them to continue working, so we lose some tremendously good people who have another five or ten years left.
Second, I have been of the impression, and correct me if I am wrong, that pensions are terribly discriminating. They discriminate against the low earners. Pensions are indexed now, and someone who retires with a pension of $25,000 does not receive much growth along the road of life, whereas someone who retires with a pension of $75,000 receives huge growth. I have always wondered why there was not a better way of indexing pensions; why fairness never came into the equation. Am I wrong?
Mr. Myles: The point you raise has been around for a long time. The classic example comes from the United States where, historically, Blacks have had much shorter lives than Whites, so they never collect the same amount in pension income on average that Whites do, in addition to being low income, but even in relation to their contributions.
I suppose the counter to that point is that most national pension systems have heavy elements of redistribution built into them in one form or another, particularly here in Canada in the parts that are funded through general revenue like OAS and GIS. Even earnings-related pensions often have a redistributive component. The point you make has added weight when we think about pension issues that confront us in the 21st century. We have seen enormous growth in longevity over the last 25 years, and longevity is continuing to increase. However, the growth in longevity is growing disproportionately to better educated, higher income earners, so that longevity gap has been growing somewhat.
When I wear my professor's hat, I sometimes suggest, in relation to the growing longevity gap that, first of all, the well-to-do received more when they were young from the educational system. The highly educated, by definition, received more when they were young from the public education system, and they will receive more when they retire because they will live longer.
In the comments I made along the lines of those made by Mr. Fougère, this is where I think asking questions about working longer and changing legislation — not only for fairness but for efficiency and productivity reasons — is happening. Attention has shifted in the last few years from thinking about OAS, CPP and GIS, which are the big, important programs for lower income workers, to thinking about the fairness implications of our private pension systems. Private pension systems include RPPs and RRSPs, which are not totally private, of course, since they receive enormous tax subsidies from the public purse.
Senator Keon: I think the system is unfair. You are all experts. Tell us how we can make it fair.
The Chair: To throw in another aspect to that question, we know that the actuarial studies are all based on the average life span of a Canadian, but we have heard clear evidence that, for example, Aboriginals do not live as long as non-Aboriginals, and people with chronic diseases do not live the same length of time.
Should that evidence be built into pension plans if these people have a life span of, not 81 years of age if they happen to be a female but 71 years of age because they have a chronic disease?
Mr. Fougère: I am not sure I have an answer to this particular question.
The only remark I would make is that, after the age of 55, a large number of people leave the labour market. I think one factor associated with that trend would be private pension plans more than the public pension system, according to our findings.
My sense is that, if we want to make efforts to encourage these people to stay in the labour market longer, we must focus more on the incentive effect of these plans, particularly the defined benefit pension plans. Defined contributions do not generate early retirement incentives like RRSPs do. Defined benefit pension plans certainly have a wealth effect, but it is like every other financial asset.
That comment is the only one I would make. Unfortunately, I do not have anything to say on discrimination.
Mr. Myles: No one at the table here is an expert in fairness. You folks are probably more expert at addressing that issue. It is a big political question. We talk about it at Statistics Canada, but it is not what we write about in our documents.
Mr. Picot: I am not sure what you mean by "fairness," but one measure that people often use in terms of fairness is income inequality, the extent to which the gap between the rich and the poor exists.
We know that, as people retire, that inequality falls. If you recall in my charts, I showed that the income level of people at the bottom of the income distribution remained constant, whereas income among people at the top fell by about 15 per cent. That means that as they move from age 55 to age 75, the gap between the rich and the poor falls.
From that point of view, if you think of the gap as one reasonable measure of fairness — one could debate that for sure — the gap is being reduced.
Another thing that comes to mind, at least in my simple-minded way of thinking about this issue, is that our objectives are to keep people out of poverty in retirement and, second, to maintain a reasonable living standard among the rest of the population.
We see that poverty rates have fallen a lot, with the exceptions I am sure you will hear about from Mr. Shillington in a few minutes. The rates are fairly low, by and large, except for single women, in particular. We have made a lot of gains there, and we also see that the income replacement rates, by and large, are positive.
When you add up all those parts, I am not sure what it tells you about fairness, but it is one way to think about it.
Senator Keon: Are you satisfied, for example, that the adjustments in place to top up old age pension, coupled with CPP, are adequate, or should there be something else?
I think, in an ideal situation, we should have minimum family income in the country instead of a minimum wage. Because people become old and are on pension does not mean they also do not need a minimum income. Have you any ideas about how we could pontificate on your ideas?
Mr. Picot: I have not given this matter enough thought to make any comments. I do not know if anyone else has.
Mr. Myles: I know you will hear about this later from Mr. Shillington who, from what he told us beforehand, will talk about the indexing provisions of OAS and GIS.
Poverty rates among Canadian seniors have fallen continuously until the last few years and fallen enormously so that, with respect to Canadian old age poverty rates, we are up there with Sweden in terms of bringing those rates down. One reason is that we measure poverty relative to what is happening to the rest of the population. We usually measure it to something close to median family income. We know that median family incomes have not risen in Canada for 30 years, nor have median earnings. There have been rises at the top, but we measure poverty relative to the median.
During this period, incomes of the elderly in Canada rose largely because of the CPP and, more recently, because of maturation of private pensions. However, if we hit a period when median earnings and median family incomes of the non-elderly population rise — and we hope they do; 30 years of stagnation in median family incomes is not a great accomplishment — we are likely to see the gap between the elderly and the non-elderly open up again.
Senator Cordy: I apologize for being late, but the flights out of Halifax were delayed today because of all our snow yesterday.
I am interested in the comments you made about the reduction in seniors' poverty, and I think that is a positive thing. However, if we look more closely at the statistics — Mr. Picot, you made reference to unattached females — the numbers for unattached women are high. Some are women who have never been married. Some are women who are widowed and who, perhaps, were never in the workplace or were in and out of it for a variety of reasons, either caring for children or caring for their parents. It tends to be the woman who stays at home.
Can we do anything with Canada pension contributions to ensure that when these women are seniors, either 65, 75 or whatever age, that they will not be living in poverty?
Mr. Picot: You are asking someone from Statistics Canada to make policy commentary, and it is not normally what we do. I will pass on that question, but I would not mind saying a couple of things. Mr. Myles may pick up on the question; that is why we brought him.
Looking into the future, there are a couple of things to keep in mind, to pick up on the positive side of this issue. I know it is serious and there are many problems here.
The labour force behaviour of women is looking much more like that of men recently. If we look at age earnings profile, or what happens to earnings, it used to be women would gain a little in their 20s and then it was flat, whereas men's earnings would go up.
Women's age earnings profiles look much like men's now. Their employment patterns are similar. I would guess we will see a big change in the future, to the extent to which pensions are driven by employment, in terms of women's outcomes.
Another aspect is educational attainment. The educational attainment of women has risen unbelievably over the last 10 or 15 years. At least among younger cohorts, as they move into retirement, we will see a big change there as well. That educational attainment tends to increase their earnings and increases their likelihood of employment, both before retirement and after.
Those are a couple of positive things looking out that I think are happening. In terms of the immediate future and the effect of particular policy changes, I am sorry, but I do not have much to say on that.
Mr. Myles: Mr. Picot is right. The question is whether you are talking about the present or the future. Future cohorts of elderly women will probably look different. The women who have never married probably do as well as men in old age. That is the kind of number I remember. Most of them have been employed over most of their lifetime. The vulnerable population is the widowed and, increasingly, the separated and divorced.
We have recently finished this first study on income replacement. There are automatic things you can do. Maybe Mr. Shillington can talk later about GIS and these kinds of things.
Complex issues are involved in understanding what generates the outcome. Is it because we do not have good mechanisms for asset splitting, upon divorce or separation? I should note that unattached elderly men have high poverty rates. Basically there is no poverty among men or women living in economic families. Mr. Picot and I were looking at the numbers today: It is like 1 per cent.
Virtually all old-age poverty is among what we call unattached elderly men and women, with women's rates considerably higher than men's.
You have put your finger on a problem. I have not been following the recent research on this issue, but I think we have an opportunity with the data we have.
I would make another note that when you are thinking of poverty and well-being, the real poverty issue among the elderly shows up among the oldest old. Men and women who manage to make it to their 80s have the highest concentration of poverty in old age.
There is an issue related to income here — if you want to address the well-being and poverty aspect of old age — that is elder care. Access to elder care in Canada does not show up in income statistics. For many, this care will be the biggest drain on income. Until now, Canada has not done a good job on the elder-care front.
You asked about housing wealth previously. One thing we have become aware of from the crash in the U.S. housing market among elderly women is that all their plans for selling the house and obtaining access to elder care have gone down the pipes.
Senator Cordy: Why are the oldest of the old the poorest? What situation changes between 75 and 85 to make them poorer?
Mr. Myles: One thing is, they tend to spend whatever assets they have. Mr. Picot's data showed why income replacement for the wealthy is lower. They tend to consume that wealth at a higher rate as they become older, and experience problems of indexing and that sort of thing. Widowhood and divorce causes a concentration among women. If women would learn to marry much younger men, the problem would go away.
Senator Cordy: That should be a new law.
Mr. Myles: Yes.
Senator Cordy: Senator Mercer made reference to immigrants who start in the workforce in Canada perhaps at the age of 40, or certainly later than the age of 20.
I started teaching school when I was 20 years old. I look at my daughters and their friends in their late 20s and early 30s, and many have spent 10 years performing contract work. These people are university graduates — some with student loans — yet they are not finding a career or full-time job until 28 or 29.
Have you prepared projections on what will happen to these people? Will they remain in the workforce longer? I guess we do not know.
Mr. Picot: We have not done the projections. We have talked about the issue. In fact, we talked about it this morning. A simulation model at Statistics Canada, in theory, would allow us to project the earnings of people now in their 20s and 30s; calculate earnings over a lifetime, and figure out how those earnings will change compared to earlier cohorts. We have not done that projection, but in theory we could. We have talked about doing it.
You seem to be well aware of all the issues we talked about. I think people currently younger than 40 have issues. Starting work later is one of them. Young people have always moved in and out of jobs when young. That is the way job matches take place in the labour market. They move around until they find a good match between the worker and the firm. Productivity rises as a result, and it is a good thing. It has increased, compared to previous periods.
This particular generation that starts work later, their earnings are lower than their predecessors, pension coverage is less, and wealth accumulation seems to be less. If I were to worry, in pension policy, about one generation, that is where I would place my focus.
Mr. Fougère: We have not prepared any projections on immigration, but we have prepared an analysis of the economic impact of selecting more immigrants. The only remark I want to make is about one important assumption regarding integration costs as to whether the economic benefits are significant or not. Integration costs are big determinant. For example, if we assume in our analysis that there is no integration costs — that immigrants adapt like Canadians — our results suggest we would have a net gain in terms of economic impact in the long run.
However, when we look at current observations and account for those costs of integration, then the result is not as positive. I think that the issue of integration costs of immigrants is a big element. Even though they come to Canada and are well educated, it may take them time to find jobs, or they may return to school. Those years spent in school or looking for jobs are years not useful for working. That opportunity cost to an economy is important.
The Chair: Thank you to all the panellists. This has been excellent and informative. We appreciate your presence.
We now hear from Derek Hum, Professor of Economics, University of Manitoba, and Richard Shillington, Senior Associate, Informetrica Limited. We also have from Women Elders in Action with us by video conference, Alice West, Chair, and Elsie Dean, Researcher.
Welcome to all of you, and we will begin with Mr. Hum.
Derek Hum, Professor of Economics, University of Manitoba, as an individual: It is a pleasure to be here. I heard the end of the previous presentation, so I will be brief in my introduction and skip the section about the population as an aging structure due in part to the low fertility rates, which leads to low, slow labour growth.
Canada has always been a country that welcomed immigrants, and it relies on immigrants today for population growth. Were it not for immigration, the population would be zero in terms of rate of growth, and population growth translates into labour force growth and productivity.
One issue I will talk about is public pensions. Canada's pensions are designed on a pay-as-you-go basis. The key ratio here is the number of people entitled to receive pensions divided by the number of workers who pay taxes to fund them. Success will depend on the productivity of the economy, the labour force growth, and in our context, also on immigration levels and the performance of these immigrants. The pressures on public pensions are those pressures that are impacted by a change in the ratio of entitlement to workers. That means there are pressures to maintain benefits, to maintain premium levels and to permit, in the future, flexible retirement options or flexible retirement dates.
Because CPP benefits are geared towards an individual's work history and their lifetime earnings, the program also applies to all workers. The issue for immigrants is, sharply put, as follows: Do immigrants' wages and earnings converge to their Canadian native-born counterparts quickly and completely? If so, then the retirement prospects of immigrants are similar to those of other Canadians. Those prospects do not mean the problems disappear; they means they are similar.
With respect to immigrants, using some jargon, economists label two aspects of the convergence, the entry effect and the assimilation effect.
The entry effect is the fact that when immigrants come to Canada, they have economic disadvantage, not only with respect to language fluency or competence but sometimes adjustment because they do not know much about the labour market or how to obtain a job. They sometimes lack recognition of their credentials, what we call human capital, and they also have what we call social network deficiencies. Many jobs depend on knowing somebody who knows their skills match those of a prospective employer, and that takes time.
In the past, immigrants have been assumed to have good motivation and so forth. Over time, many of these deficiencies are eroded. They are overcome. With superior motivation, often immigrants typically become "more successful" than native-born Canadians with respect to earnings. This myth has been one of the sustaining ones of Canada, perhaps fostered by the success of the 1960s.
I have two charts in my hand-out. It is obligatory for economists to include one or two charts, but I will not refer to them right now.
The recent experience of immigrants is what we should be concerned with. In the last couple of decades, immigrant earnings have not converged as quickly as in the past. Some estimates, including those by Mr. Picot and Mr. Morissette, suggest that the gap has also been growing, that is, the difference in earnings of immigrants as they enter, and the work of Hum and Simpson, my own work, suggests that these immigrants never catch up in their lifetime. This story is different than the sustaining myth that was so popular, looking back at the 1960s.
Past cohorts of immigrants experienced small entry effects, fast assimilation and rapid convergence, even overtaking the native-born economic performance. The present cohorts have large and growing negative effects. They are slow in terms of assimilation, and many immigrants never experience convergence over their working life. We can go into the reasons for that later. Today, for this committee, the question is, will immigrants achieve the earnings pattern similar to comparable native-born workers? If so, their retirement prospects will be the same as native-born Canadians. If not, they will experience lower pensions, lower poverty and lower well-being — the consequences you heard from the previous witnesses. Therefore, I want to address the question of what are the implications of this gap between the foreign born and the native born for pensions. One way to put it as follows: What pot of money at entry would represent the gap faced by an immigrant cohort during a work career of 25 years?
Mr. Picot said that he did not look at lifetime earnings profiles. This is where I believe I make a contribution to this committee. I have calculated the lifetime earning profiles of native born and immigrants. I will not go into the technical econometrics, but obviously, if public pension plans are geared towards lifetime earnings, to find out what they might receive when they retire, they need to decide what their lifetime earnings were. Therefore, looking at earnings over a short period, or one year or two years will not be helpful.
Simply, I took cohorts or individual immigrants, and taking into account the negative entry effect and the rate of assimilation, calculated their lifetime profile over their working career until they retire. Then I looked at a comparable set of Canadian-born individuals and calculated the same thing. When I say comparable, I mean if an immigrant is male, with post-secondary education and married, I will find the native-born male with a post-secondary education, so forth, because it is not fair to compare, say, an immigrant medical doctor with a native-born carpenter. Therefore, I looked at it that way. Then I took these profiles, and the rest is a bit of economic fiddling, calculated what we call the net present value of this entire lifetime stream. That calculation represents the pot of money that is available for them at pension time. I then calculated the immigrant portion as a fraction of the comparable native-born one, so that we do not need to worry about dollars, inflation and changing numbers.
After all of that, I do not want you to think this calculation is magic hocus-pocus, but a great deal of detailed accounting is needed to come up with a meaningful number. I do not want to give you all the equations and the calculations. I boiled down the calculations to table 1, two discount rates — I chose 5 per cent and 10 per cent — which is basically an interest rate. The other numbers show the immigrants that came between 1976 to 1980, the immigrants that came between 1981 to 1985, and those who came between 1986 and 1990 and so forth, because the economic conditions at the time that the immigrants come to Canada determines how well they fare, and so forth.
The bottom line, and I will not characterize it by large or small, is the following numbers: It is in the 20 per cent to 30 per cent and it has been growing over time, so that is one way to look at it. The gap in earnings, on page 19, is in the order of 20 per cent when the immigrant is around 69, and approximately 10 per cent at age 60, so that tells you the shortfall of relative disadvantage of immigrants to Canadians.
That table does not mean Canadians are not disadvantaged. I simply show the immigrant situation relative to the situation of native-born Canadians. I took age 69 as a benchmark because that is the time in which they must take their pensions. At my university, we do not have mandatory retirement, but mandatorily at age 69, we must reduce our workload. It is a conventional age. It is the new Bismarck age. It is 20 per cent. That is the bottom line.
I know I have been cavalier in terms of my subtlety, but the conclusions are, immigrants continue to do worse than Canadians in terms of their entries. This gap in pension income between the foreign-born and native-born men is likely to rise. The last conclusion is for the researchers: Several data sets all over the Census as well as detailed, individual records from taxes as to the Survey of Labour and Income Dynamics, SLID, give similar numbers, so that gives us some confidence that I am not picking these numbers out of the air.
Richard Shillington, Senior Associate, Informetrica Limited: Thank you for this opportunity to speak about income security programs for seniors. I have taken this time to submit an extensive brief on these issues. I want to begin by emphasizing the critical importance of Old Age Security, Guaranteed Income Supplement and the Canada Pension Plan to the income security of Canadians.
I will concentrate on that half of Canadians who retire without an occupational pension plan, many of whom live on low incomes. Whether they are labelled poor depends on which poverty measure is used. I do not think that whether they are labelled poor changes their standard of living or their income.
About half of Canadian families retire with no occupational pension plan. About 25 per cent of Canadians retire with no occupational pension plan or registered retirement savings plan, RRSP. The average amount of money in an RRSP for people who retire without an employer pension plan is between $30,000 and $40,000. I will show that they actually are ill-served by having saved that $30,000 or $40,000.
For single seniors without a pension — by that I mean, without an occupational pension — their median income in 2002 was $15,000; 82 per cent of these single seniors without an employer pension plan will have an income below $20,000. As the discussion below demonstrates, the design of the GIS makes it difficult for these low income seniors to improve on their financial circumstances. I will talk for a minute about the GIS clawback.
Approximately 38 per cent of seniors receive some GIS. The majority of seniors who have retired without an occupational pension plan will be eligible for GIS. GIS benefits are reduced generally by 50 cents for every dollar of income. Income that affects GIS includes RSP withdrawals, investment income and any wages. In addition to reducing GIS benefits, those sources of income are still subject to income tax. Thus, the effective tax rate on income for those on GIS is often 50 per cent or 75 per cent when we include the income tax.
To illustrate, imagine a senior on GIS removes $1,000 from their RRSP. Their GIS cheque will be reduced by $500 the next year. On top of that reduction, they will pay income tax on the RRSP withdrawal, which could be $200. Thus, they keep $300. If they live in social housing, where many low income seniors live, their rent will go up by $300 because of the RRSP withdrawal. This increase eliminates any benefits to them from their RRSP withdrawal.
On top of this situation, depending on their circumstances, their RRSP withdrawal can have other effects. In many provinces, they will pay more for their prescription drugs because the deductible depends on their income. They will increase their cost of home care in some provinces. In some municipalities, because it depends on the municipality, what they pay for Meals on Wheels will be affected by that RRSP withdrawal.
The GIS recipients in social housing can easily face an effective tax rate of 100 per cent. They are not allowed to keep any of the benefit from any extra wages or from an RRSP withdrawal.
The primary beneficiaries of employment income or RRSP withdrawals is government.
The design of the GIS creates a poverty trap by making it difficult for low-income seniors to improve their circumstances by using savings in an RRSP or taking a part-time job.
I will make some observations about the administration of OAS, GIS and CPP. I was told that the primary focus of this committee was on poverty and seniors, so I have concentrated on these issues.
One simple way to improve the finances of low-income seniors is to ensure entitled benefits are received. It must be recognized that the majority of seniors receive their OAS, GIS and CPP benefits, and the system works well for all but a small percentage. My involvement in these issues started about six years ago when I drew attention to the fact that roughly, at that time, 300,000 seniors were not receiving the GIS they were entitled to. After some publicity, seniors with all sorts of problems with OAS, GIS and CPP contacted me directly with their stories, informing my observations, which I will share with you.
I will speak about OAS, GIS and CPP, and will touch on the issues of take-up, retroactivity, interest on retroactive payments and the determination of administrative error.
Thousands of seniors are not receiving benefits they are entitled to: OAS, GIS, CPP retirement, survivors, disabilities and death benefits. Thousands of seniors are missing out on these retirement benefits.
The number of people missing Quebec Pension Plan retirement benefits is virtually zero because plan administrators contact people directly, by phone if necessary, to sign up people they know are eligible for QPP benefits. Often, when seniors miss the GIS benefits they are entitled to, they also miss out on provincial health benefits tied to receiving GIS or nursing home care.
In the province of Newfoundland and Labrador, prescription drug plan coverage is available for GIS recipients but not for seniors who are not GIS recipients. When seniors do not receive the GIS they are entitled to, they do not receive the free prescription drugs they might have otherwise.
The general rule in Ottawa is that when a retroactive benefit is paid — a senior discovers 15 or 20 years later that they have been entitled to these benefits — they were given 11 months of retroactive payments. This situation is true even for CPP, which is funded by the contributions of the citizen.
When retroactive payments are made, interest is not included. Interest is not included even when the retroactive payment is necessary because of an error made by government. Because CPP is contributory, retroactivity provisions should reflect the fiduciary responsibility.
Even if we accept that the department has no obligation to inform citizens of their benefits, that the department has no obligation to inform seniors about their CPP when they are at the wicket applying for Old Age Security, that is a separate issue from entitlement to the benefits funded by their contributions to CPP when they discover they have not been receiving them.
In summary, I have spoken superficially on a number of issues: the GIS clawback, or what I call the poverty trap that creates; the take-up issues for OAS, GIS and CPP; and the duration of retroactive payments and interest on those retroactive payments.
The Chair: Thank you. That information has given us more than a little food for thought. Let me turn now to Women Elders in Action, and apparently we have Jan Westlund in the room as well. She will not speak, so she is not on camera. Welcome, Ms. Westlund.
We will start with Ms. West, the chair of the group.
Alice West, Chair, Women Elders in Action (by videoconference): Thank you very much, Senator Carstairs. We have been talking amongst our group, made up of senior women, about poverty; the reasons why senior women, in particular, have difficulty with housing, transportation and all the things that go along with poverty.
We were compelled to look at senior women with incomes below the low-income cut-off, as so many were in this group. We found, while speaking with these women, that there were many myths out there. One of them is that women are in the workforce now as much as anybody else. However, we find that 58 per cent of the women over 15 and 68 per cent of men were in the work force in 2004. Women have waged work for only 75 per cent of their potential earning years versus 94 per cent for men. Nearly twice as many women as men are involved in caring for children and elderly relatives.
Another myth is that more women today are well educated, which ensures high paying professional jobs. People with post-secondary certificates, diplomas or degrees hold 38 per cent of the low paid, dead-end jobs. Women hold two-thirds of those jobs. A full 40 per cent of jobs held by women are considered to be non-standard, part-time, contract or temporary jobs with few if any benefits.
Third, we find that employed women contribute to Canada Pension Plan so they will have a comfortable retirement income, and this is a bit of a fallacy. The average CPP pension for women in October of 2005 was $334. This pension is 63 per cent of that received by the average male, which is $527. Women work fewer hours and often for less money, and as CPP payments are based on earnings, their pensions will be modest.
There is a fallacy that women earn great big salaries these days. It is not so. In the Statistics Canada 2006 report, Women in Canada: A gender-based statistical report , on page 133 it says:
In 2003, the average annual pre-tax income of women aged 16 and over from all sources, including employment earnings, government transfer payments, investment income, and other money income is $24,400. This was just 62 % of the figure for men, who had an average income of $39,300 that year.
On the average, for full-time work, women earn only 71 cents for every dollar that men earn. In British Columbia, we find that half the senior women live on incomes below $15,000 a year. Professional women also lag behind men in earnings. A comparison of salaries for full-time teachers is, female teachers at $47,500 and male teachers at $63,300.
Another fallacy is, employed women have a workplace pension to enrich their retirement. In 2001, over 60 per cent of women in the workforce did not have access to workplace pensions. Fewer companies offer pensions in 2006, and we find there is a break now from defined benefit plans into offering defined contribution plans, which creates another great big myth.
Often women are told that their husbands' pensions usually will be more than adequate for their wives if wives do not have one, but the chances are the wife will outlive the husband; and upon death, the last survivor rate is set at 60 per cent. Pension experts suggest that the amount needed for a wife to continue the same standard of living shared by them together is 10 per cent to 15 per cent less.
Often, workplace pensions are not indexed. As the cost of living goes up, this lack of indexing becomes another hardship. It means that a survivor may lose an additional 2 per cent to 3 per cent per year.
Pension splitting and workplace pensions in divorce proceedings are not mandatory. We have to ask for those pensions.
Many people advocate RRSPs, and we find that it is not easy to have an RRSP. Three out of 10 Canadian families have no private pension assets, workplace pensions or RRSPs. They find it difficult to find the cash to make these contributions. In 2005, less than one-third of all people with room in their plans made contributions. In 2005, contributors used up only 7 per cent of their available room.
Another myth is that the government pension at the age of 65 is sufficient. The old-age pension paid to those over the age of 65 was approximately $492 a month in early 2007. When combined with a GIS given for those with no other income, the amount increases to approximately $1,113. When a woman's average CPP payment or similar amounts for other income is factored in, total income is approximately $1,260 per month or $15,120 per year.
Many immigrants who have not lived in Canada for 40 years between the ages of 18 and 65 are not eligible for the full old-age pension.
I will turn the floor over now to my colleague Elsie Dean, who has remedies for these dire situations.
Elsie Dean, Researcher, Women Elders in Action (by videoconference): Thank you for allowing me and our organization to appear.
You have heard the myths about women and their income from Ms. West, so we have come up with proposals to alleviate some of the poverty we find, especially amongst single women.
One recommendation is to increase the GIS so that the old-age security and GIS is at a level that is at least commensurate with the pre-tax low-income cut-off. We also wish to raise the income ceiling for maximum Canada Pension Plan contributions. We could raise it, we think, from the present $40,500 to at least $60,000. This increase would put more money into the CPP fund, which then could be used to modify the plan so it replaces 50 per cent of the income for low-income workers, who are, of course, disproportionately women. The current maximum of 25 per cent of average wage consigns those receiving the least pay to a continuation of extreme poverty, as you have heard.
We oppose privatization of public pensions. There is a lot of talk about privatization of pensions. We know pensions have been privatized in certain countries where they have already failed. It would be catastrophic to ask women and low-income earners to save for their retirement strictly out of their own income.
With respect to the value of volunteer caregiving, the figure that came forth in 1996 was approximately $5 billion. It has gone up since and will probably go up more. We feel that volunteer caregiving should be recognized, that there could be an extended dropout period in CPP to cover volunteer caregiving for people with disabilities and for providing elder care, which seems to be on the increase.
We can also ensure incomes below the poverty line are not taxed. This measure would help people on low incomes to have more cash in their pockets.
In December 2007, we revised our recommendation regarding converting income tax deductions to credits for RRSPs and RRPPs. We feel that financial security for senior women in Canada in 2007 suggests that the dollar limit on RRSP contributions should be reduced and savings in lost tax revenues redirected to improve OAS and GIS benefits for low-income individuals. We endorse that recommendation.
We have questions about income splitting. It will not help single people, and it will not help low-income single women. We believe it needs to be looked at for fairness and what benefits can be given to low-income single people in lieu of income splitting.
We believe that public pensions should be fully indexed. We are concerned that a few years ago, the federal government did not provide full indexing according to the cost of living, and that these monies have never been distributed. We think the federal government should look at the money they saved, and consider how they can use that money to improve the income of low-income people.
Many complementary policies could be adopted that would help supplement low incomes or make the lives of low- income people richer. One of those policies, of course, relates to the fact that housing is such a problem now. We find that people pay 70 per cent, 80 per cent, and in some places 90 per cent of their income on housing. We strongly recommend that the provincial and federal governments return to reinvesting in affordable quality housing.
In Vancouver, a one-bedroom apartment rents for well over $1,000 a month. One can see that cost makes it impossible for low-income people to rent and have anything left over for food. That point is important. The fact that housing prices go up does not help the person on low income because the price of their accommodation goes up as well. There seems to be a general consensus that people can sell their home, but this view does not fit with the idea of aging in place, which most seniors want.
Those are some of our recommendations. We have many more in the document we sent to you, Pensions in Canada: Policy Reform Because Women Matter. We hope that you will look at those recommendations and consider them as well. Thank you.
Senator Mercer: Thank you all for coming here. You have given us a lot to think about. Mr. Shillington, you scared the hell out of us, but I think you also confirmed a lot of things we already knew. Our last group, Women Elders in Action, came armed with about 12 recommendations.
If you all had one recommendation to give us — I see you cringing — give us your top two or three recommendations, if we had to boil it down to those.
Mr. Shillington: That task is tough. Part of this is biased by stories I hear. If I had to make one recommendation — and it is in my brief — it would be for the guaranteed income supplement to ignore the first — I will propose — $4,000 of income. I should probably say $5,000 so I can bargain down to $4,000.
The recommendation is that the GIS ignore the first $4,000 or $5,000 of income, regardless of source. The reason is because it would put money into the hands of many seniors. Many of them will have some form of income.
More importantly, it will allow them to improve their circumstances. Currently, a portion of seniors on GIS go out and earn money, not knowing that six months later they will lose virtually all of what they have earned.
In my case studies at the back of my paper, there is a story about Frank who did the math and worked out that he lost all his money. If you go to my website, to the section called "Retirement Planning for the `Rest of Us,"' you will see advice to work out whether you will be on GIS when you retire. Then you will know whether RRSPs are a good idea or the worst possible investment for you because they will be clawed back. I do not want to give that advice to Canadians. I do not want Canadians to ask me whether to get rid of their RRSPs. I want to be able to tell everyone to take the tax advantages of RRSPs, and when they retire they will be treated fairly on withdrawals. We could have a system that says, take out a little every year, $3,000 or $4,000 — which for them is probably a lot of money, but when we retire probably not that much money — then they will know that as long as they withdraw only $3,000 or $4,000 a year, they can keep it. The same thing applies to their earnings: If they earn $4,000 or $5,000 a year, let them keep it.
If I had to choose one recommendation, it would be that one because, first, it would increase the income of seniors. It would also increase their freedom.
Senator Mercer: Our friends in Vancouver had 12 recommendations. You did not indicate their order of priority. If you had to prioritize them, can you tell us which of those recommendations would be a priority: one, two or three of your main priorities?
Ms. Dean: To prioritize is difficult because each recommendation adds only a small amount to the income of low- income people. We would like to see them all looked at seriously.
Having listened to, and having read, the discussions about privatizing pensions, that is one of our big concerns. We realize it would be difficult for low-income people to save. This problem has already been experienced.
The other recommendation is increasing the GIS and not taxing any income below the pre-tax low-income cut-off. Those would help.
Senator Mercer: Dr. Hum, do you have a comment on what might be the top couple of priorities?
Mr. Hum: I will add my two cents' worth. I have done a lot of work in this area, although I was not asked to talk about this area today. Members of the committee should know that in a former life I was research director of a guaranteed annual income program. Recasting the language, the GIS is essentially a guaranteed annual income for individuals over 65. It basically says, if your income from all sources is below this amount, we will ensure it comes up to this amount with the GIS. No other age group has this guaranteed annual income.
In that language, and my six to seven years of field experience in operating this program, the issues that Mr. Shillington talked about are what we call tax integration and a punitive tax rate. The minute we gave them a guaranteed annual income, they said they do not want it because it is such a small amount and they lose housing, dental access, vision care and training eligibility. I had to deal with that problem.
Within that context, my priority — and this is a non-radical priority — is to do two things: Concentrate on increasing the GIS. If you have enough money, make it non-taxable. If not, at least — along with the suggestions of Mr. Shillington — raise that exemption.
In both what the elders and Mr. Shillington said — I know Mr. Shillington knows it but he did not emphasize it — all the tax integration problems literally cannot be solved probably by recommendation of this committee because the CPP and the GIS are of federal administration and jurisdiction — including Quebec — but all the other income maintenance and welfare programs such as Pharmacare, dental care and housing, are of provincial jurisdiction.
Unwittingly — I will be charitable — we sometimes have unconscious cross-purposes in which the programs intended to help the same class of beneficiaries work at cross-purposes.
I do not think we can solve federal-provincial relationships today. Therefore, within this context, we must assume the provinces will do what they want with their programs. If they say the cut-off for pharmacy is this point, I do not think the CPP, OAS or the GIS will have much leverage.
I am not being a coward; I am simply saying, let the provinces do that. The problem remains, and that is why I am inclined to live with the fact that the provinces exercise their jurisdiction but the federal government concentrate on increasing the income portion. I would probably see — I am such an optimist — if you could obtain a provincial coordination or a code of conduct to exempt the GIS, in the same way that pension payments for individuals are guarded safe against litigation and so forth.
That is quite a bit to chew for me today, and I am a small thinker. There are complications in terms of program integration, but the punitive tax rate of 100 per cent remains. It is better in some provinces now. With respect to those on social assistance, many provinces have moved to not disqualify individuals for these programs because they receive social assistance. I cannot see why it is not a small step to do the same thing for receipt of GIS.
Senator Mercer: Dr. Hum, in relation to immigrant participation, while there seems to be agreement that immigrants will not fare as well in retirement as native-born Canadians, have you conducted any analysis of their children?
Mr. Hum: Yes, I have. That is a different story.
Senator Mercer: Is it a better story?
Mr. Hum: It is another story. I will preface my comments by saying, I hope that what I said about immigrants not catching up will not be interpreted as a totally unhappy story. I do not put that spin on it.
I recently published work extending into the second generation, because my concern was more for the second generation. In many ways, I do not interpret all my findings about the inadequacy of catch-up of the first generation as all bad because many immigrants did not come with that expectation or role. They came, in many ways, as a sacrifice to give a better opportunity to their children. If we fail at the second generation, then I think society should be held to account. I am less hawkish about the first generation.
What is the story? Every economist has good news and bad news. The story generally is that the second generation fares better than their parents, or the first generation. An optimist with a long-term view would say this problem cures itself in the next generation. On the other hand, it makes a difference when we look at subgroups. It makes a difference whether the second generation is a child of two immigrant parents or a child of one, meaning an immigrant who marries a native-born Canadian. Their life chances in achievement and attainment in income are different. To further complicate the issue, it makes a difference whether the immigrant is a man who marries a female native born, or is a female immigrant who marries a native born, so there are gender differences in terms of achievements.
Sweeping all that aside, I will be the economist now. Why does the second generation perform better than the first? It turns out, according to my research, that the pathway to superior performance is through educational attainment. It is not because they are smarter, they are luckier, they win more lotteries or they work more hours. It is through the educational channel. I have calculated how much extra education a second generation male or female gets with one or two immigrant parents, et cetera, and this pathway is the one to better performance. If there is anything to this economic aphorism that more education tends to lead to higher economic earnings and wages, which I believe is the case, then that aphorism explains the success of the second generation.
Senator Keon: Mr. Hum, as Senator Mercer mentioned, the Women Elders in Action ably suggested 12 recommendations to us. I am reminded of the method of payment for health care in America compared to Canada, and about 30 per cent of the money in America is wasted because of multiple payors. We save about 30 per cent up front by having a single payor. It seems to me that all these recommendations are a bureaucrat's dream. Can you imagine how many new buildings we will need at Tunney's Pasture if we implement all these systems? Why can we not simply push as hard as possible for a floor of guaranteed family income and guaranteed individual income, and forget all the other recommendations?
Mr. Hum: I lived through that.
Senator Keon: I know, and that is why I ask you first.
Mr. Hum: You will give me three minutes, right?
At least some of you are as old as I am and remember the constitutional conference of 1972 that floundered because we did not have agreement in resolving social policy and income maintenance, which led to the Marc Lalonde social security review, which led to the guaranteed annual income experiment, and that is where we tried this approach. We said, "Why not, in the jargon, have the big bang, simple solution? We will eliminate Unemployment Insurance, welfare and all these programs, and give everyone a guaranteed annual income, designed to integrate with the tax system. The program will be simple. We will eliminate everyone in Tunney's Pasture. They would keep me as a researcher there, of course, but we will solve all these problems."
It was an idea that was ahead of its time, and it is an idea that, with tweaking, I still support. I will give some personal biography. What looks to be simple in the planning blueprints becomes endlessly elaborate in the actual delivery because the human condition is so varied that we must begin to make adjustments. We made adjustments for the various integrations of the programs. We made adjustments for students and for interns who were specializing in cardiac surgery and will make a lot of money but fell below the floor and received guaranteed annual income payments, until the minister said no. We needed to distinguish between temporary poverty versus long-term poverty. We needed to work out federal-provincial relationships. We needed to work out people who switched back and forth. We needed to work out people who, shall we say, switched marital partners as to how we would divide the assets. "He left me, but he took all the pension assets with him," et cetera.
Senator Stratton: Not today.
Mr. Hum: As I said, this era was different. We needed to work out a range of emergency expenses like funerals and tragedies that are a simple one-floor fits all at all ages of life, all ages of life cycle, in all circumstances. I received a baptism and then started changing my views. With some broad groups, roughly homogeneous, we can make this approach work. For other groups, the complexity of their marital, financial, family and life stage situations requires something less blunt. I am an advocate of a guaranteed annual income, but perhaps not as combative and aggressive an advocate as I was, as Shakespeare said, in my salad days.
Mr. Shillington: In broad strokes, for senior citizens, we have a guaranteed annual income. I suspect that the administrative costs associated with OAS, GIS and Canada Pension Plan are exceptionally small as a proportion of the benefits flowing through them. The huge, I suspect insurmountable, challenge is to design a guaranteed annual income program for younger people where there is a work expectation. We have a guaranteed annual income in place for seniors with Old Age Security. We could debate the relationship between years in Canada and the benefit level. The guaranteed income supplement supplements the incomes of low-income seniors and the Canada Pension Plan. Each can be improved, but the raw material is in place now.
Senator Keon: Why are we agonizing over it today?
Mr. Shillington: There is the benefit level, and, with a little encouragement, I can become cynical, having worked in this town so long. Recall that the vast majority of people who design these policies do not rely on these programs. I assume that no one in this room is at risk of relying on the guaranteed income supplement when they retire, if they are not already retired.
I am struck by how, in the design of a program, the reason the guaranteed income supplement has such a high clawback rate — the only program that has a higher clawback rate is welfare — is a belief that we must give the benefit only to those who particularly need it, and not to people who do not need it. That is the reason for the design of the guaranteed income supplement. For every dollar we spend on the guaranteed income supplement, we spend $4 or $5 supplementing the income at retirement of people who are not poor. We do not use need. The average pension income of people with pension income is $20,000. For a couple with two pension incomes, it is $40,000. A significant amount of that money is there because of the tax treatment. I would be run out of town if I argued that we should give the RRSP supplements, and I will call them that, only to people who need them.
It would be absolutely contrary to our instincts to ask: Why are we spending tax dollars to subsidize the incomes of people who have high income? They do not need it. The point is that the tax treatment for pensions and RRSPs is not based on need. It rewards savings.
With that in mind, why do we change our attitude 180 degrees when we look at the supplements that we might give someone whose income is $12,000? We have no problem at all spending public money to take the retirement income from $80,000 to $100,000 for someone who is retired and who has an employer pension plan.
However, when we want to take someone's retirement income from $14,000 to $15,000, we say, be careful and make sure they truly need it. I assert that is a fact. That is behind the thinking of why we spend so much money subsidizing retirement income of people who are not low income while worrying about money paid to low-income seniors and to those people who truly need it.
Senator Keon: Can the three women from Women Elders in Action tell me if they are satisfied with the programs in place to take care of them. What are they doing there if they are satisfied the programs are in place to take care of them? Mr. Shillington said the programs are there now: Maybe they are not working, but they are there.
Ms. Dean: The programs, referring to GIS and old-age pension, are not adequate. They do not increase with the cost of living for seniors, and we have some work to do on that.
According to what we are told, people who must live on these amounts find it more and more difficult today as costs increase.
One of our concerns, and we hear much about it, is raising the pensionable age, which of course would be catastrophic for seniors, especially women who are the main caregivers. Already, they have put in many hours in their life, so we hope there will be no move to raise the pensionable age itself.
The Chair: I want to assure the women that there has not been the slightest bit of interest in this committee for raising the age for collecting a pension.
Before I turn to Senator Stratton, I am not in the habit of congratulating this government, but I think their move to use the tax system as a way of identifying people who should collect the Guaranteed Income Supplement, although it does not cover all people in need because it does not cover those who do not pay taxes, is a strong step forward.
Senator Stratton: You took the words right out of my mouth. In my view, I liked a couple of things that were said very much. One was to allow people who collect pensions to withdraw some of their RRSP without penalty. I think we need to offer incentives to withdraw RRSPs. I think it should be seriously considered. Two of you mentioned that recommendation, which was interesting.
The second suggestion is to increase GIS. I am of the belief that we should not tax people at the poverty level. I have always been appalled at that concept. You would think that, in our society today, we could gradually increase the levels by which people are not taxed. Hopefully, we can move strongly in that direction, because to me, that is the best way to help them. They should not pay tax.
With respect to housing, we went through the housing subsidy or building process in the 1970s. I was a part of that process. We created a huge bureaucracy, in effect, to do administer that program. If we did that today, I would rather see it done through a gain or another method by which, if someone could not afford housing, they received help through the tax system or subsidies rather than building homes to move into. To me, that approach is an error.
I want to hear our witnesses' reactions to those three things: The withdrawal of RRSPs without tax to a certain level; raising over time the level by which lower levels are not taxed; and a different approach to housing than having the government take care of it.
Ms. Dean: With respect to the whole point on housing and what women and low-income people are experiencing in British Columbia, the cost of renting is going way up. The provincial government subsidizes rents, but they only provide a subsidy of up to $700 a month. Of course, rents are going well beyond $700.
Therefore, it is difficult to control a market that is volatile now in housing. The buildings are selling before they are built. There is little rental housing, especially in Vancouver. Around the province rents have gone up. We think they should take another look at the GIS and what they feel people in small towns need to live on because we do not feel that amount is adequate anymore. The low-income cut-off is much too low in today's market.
Having governments provide housing would be a great boon because governments can control the rent and ensure that people do not pay more than a third of their income in rent. That rent control would be another subsidy. It was used in the past and it worked. I do not know how they built a bureaucracy, but surely that can be avoided.
Mr. Hum: I will leave the RRSP question to my colleague. I will not talk about it at all because I will become too emotional and long-winded.
With respect to the second question, I will be brief. It is a matter of terminology. Most people are familiar with the positive income tax: anyone who earns income above $1 million pays tax. Economists, in studying social programs, talk about the benefit reduction rate, which is that for every dollar earned, they lose $1 of benefit, or 50 per cent, or whatever it is. We use jargon called "benefit reduction rate," but sometimes in our looser moments, we still call it effective tax rate because it is an effective tax.
Even though they may raise the GIS and make it tax exempt, that does not mean it is not subject to my jargon, a tax rate, because the provincial government would penalize the person by reducing their Pharmacare benefits, vision care and housing. From that point of view, as an economist, they are taxed.
I have also completed work on the housing issue. The issue raises one of the fundamental issues of social policy. To help a group, any group, do you do so by giving them money — because we are a market economy — so they can exercise choice in the market by what they want? In other words, if you give me the money, I buy the tie; if you do not like the tie, it does not matter because I like it. Or, do you give me a tie because you think I need a tie? This is called "in kind."
We have a mixed philosophy in Canada. With respect to health care, we give it in kind.
If someone is hit by a car, they do not ask them if they would like to go to a hospital or if they would like the money. They do not have that choice.
Housing, on the other hand, depending on the province, is something in between. Some provinces, like Manitoba, say they will bill them. Other provinces, I will leave them unnamed, say no, they will help them through the tax credit system and the person needing the house will buy it.
One difficulty, and I am not endorsing it, is that some studies show that when governments give the money to individuals in the name of empowerment, if the market does not respond by increasing supply — so that the supply of housing is fixed — this approach raises the level of rents. Economists show that these monies go into the hands of the landlords without increasing a single dwelling unit available for the target population. American studies have shown this impact, which was the motivation for some jurisdictions to say we will not go that route.
I hate to be such a downer, but life is complicated in social policy. There is a fine line in doing what you can. In response to Senator Keon, I am no longer a "big bang, I've-got-the-magic-bullet" kind of public policy analyst that I was in my salad days. I am becoming older.
Mr. Shillington: When you said RRSP withdrawals, was it tax-free or free from GIS clawback?
Senator Stratton: To me, clawback is a tax. It is the same thing.
Mr. Shillington: I already said what I think. RRSP withdrawals, up to a dollar limit, should be ignored by GIS. This issue is complicated. I could have come up with 12 recommendations easily on each of the programs, on problems. There is a $2,000 pension credit. The first $2,000 of pension income is tax-free. It is still clawed back. The first $2,000 of withdrawals from a Retirement Income Fund, RIF, are free of income tax for those who are over 65 but not if they are under 65. However, there is no provision like that for RRSPs.
I regularly put on workshops and help people plan for retirement. Few people know that when they turn 65, immediately there is a tax advantage to take money out of a RIF rather than an RRSP. We have designed a road with so many potholes. Why do we not fill the potholes? Why do we not say, at age 65 the first $2,000 of RRSP withdrawals are tax-free as well? Why would we bring in tax-free for income tax purposes but still claw them back only for the poor? I do not understand the thinking behind that approach.
On tax credits, I gave a talk a year ago at a riding in Northern Ontario for a friend. He brought in many seniors, and I spoke twice that day. One topic was about increasing OAS and GIS. I agree with the sympathy, but remember these programs are basically a zero sum game. A gentleman or a woman age 30 who is earning $20,000 a year pays more tax so that a senior with that income pays less tax. That is essentially the argument. The money must come from somewhere. Seniors were arguing for increased OAS and GIS. I agreed with them but asked them to recall that many young people out there were without good incomes. There are 150,000 Canadians aged 55 to 64 on welfare. In Ontario, a single person receives $6,000 a year.
What are our priorities? We want to increase the financial circumstances of seniors, but that money must come from non-seniors. Many people see their income rise when they turn 65. They are on welfare, disability or some program. Their income will go up when they turn 65, so do we take money from people under 65? It is a balancing act.
The same situation applies to your tax proposal. These issues are complex. We must recognize that we must take money from some people, many of whom are not well off. I wish I had the numbers in front of me. A person starts paying income taxes as a single person under 65 at $9,000 of income. Do we take money from those people to reduce taxes of other people whose income is higher. There are lots of problems.
OAS and GIS pay the same dollar benefit no matter where people live. They can live in downtown Ottawa, Toronto or Vancouver, but it does not buy the same standard of living. Maybe that is a problem; maybe it is not.
With respect to housing, I do not know enough about it, but many seniors retire with their home, and there is no effective way for them to turn that asset into an income stream. They can put a mortgage on the house or obtain a line of credit with the house as security, or they can have a reverse mortgage. The administrative costs and the interest rates vary dramatically. If there was an efficient way for people to turn home equity into an income stream, that might help some people. About two-thirds of people retire owning their own home.
Some people think that RRSPs are a great alternative for people who do not have a pension plan. It is true that for high-income people who do not have a pension plan, that option is great. Eighty per cent of RRSP assets are owned by people who have a pension plan. The vast majority of RRSP assets do not prevent poverty. They supplement the income of people who would have been all right anyway.
For the people who have a pension plan, RRSPs work great. It supplements their income and we subsidize it with the tax system. For people who do not have a pension plan, they are probably on GIS, and RRSPs are the worst possible way for them to save for retirement.
Senator Stratton: When I say, take people off the tax rolls at the lower level, I mean all people, not only young or old. I am not identifying only seniors, but everyone.
With respect to housing, Manitoba has rent control. We still have it. Guess what, multiple housing is not built because it is controlled, so there is the availability problem. The vacancy rate in Manitoba is extremely low, so as a result, little is available for people to rent.
I do not believe in governments taking that approach because, in my experience, living in Manitoba shows it does not work.
The Chair: I think some Manitobans would disagree on that particular issue.
Senator Cools: I thank both witnesses for coming before us and bringing their particular set of professional skills to the table.
I am interested in the notion that the GIS has created — I think Mr. Shillington used the term — a poverty trap.
Since your specialty is crunching numbers, I wonder if either of you, Dr. Shillington or Dr. Hum, has ever looked at the phenomenon of comparing the cost to the government of clawing back this money and the quantum of money clawed back.
Mr. Shillington, you take the view that $4,000 should be the number based on the notion that the GIS should be structured like the child tax benefit. You take the position, and you recommend to us, that there should be a value of $4,000 per year of income that is ignored by the GIS before they start to claw back.
I think of the staff, the paperwork and the endless man-hours to claw back a remarkably small amount of money. Have any of you have ever performed that analysis, looking at the number of people? We all know that bureaucracies are huge, and sometimes the actual sums of monies recovered are remarkably small. Has anyone performed an analysis that would support such a recommendation?
Mr. Hum: I have completed two related pieces of work but they are not exactly on that program.
During an earlier life when there was such a thing as a family allowance, and before the introduction of what is now called the child tax credit that was based upon family allowance. The child tax credit is essentially means tested whereas the family allowance was automatic. If you trusted Canada Post, all it cost was the price of a stamp to deliver it, against the cost of the bureaucracy of the tax system to calculate this credit. My staff calculated at that time the difference between the two alternatives of delivering the family allowance or the child tax credit, and the ratio was 35 to 1. In other words, it cost $35 more to deliver it through that system than mailing out the checks — depending on the price of postage. I would suggest, if I had a chance, that we should follow the family allowance approach and give the GIS in the same way.
How much money did the program cost? I did not calculate it for one program. I am an academic, and I do not know who will call me next, so I did it for all social programs in Canada. If we took the amount of money we spent on all social programs, and this is an exercise, and delivered it all through what I call a modified refundable tax credit scheme, which is the current language for GAI, non-pre-means-tested delivery, how much poverty reduction could we achieve by taking that approach? I calculated that number. I do not have the numbers in front of me, but I hasten to add that many of these programs are put in place, and while they have a significant anti-poverty objective, many people claim that objective is not their sole or sometimes primary objective. One has to be reasonably careful here. With the OAS and CPP, I offer a tentative, half-baked answer to Mr. Shillington's puzzle about why government likes these high tax rates because the texture is different when I appear before a series of people in regard to Department of Finance matters. They basically want different things.
In a study I conducted to celebrate the Carter commission — I do not know if any of you remember that. You must be as old I am, Senator Carstairs.
The Chair: I am indeed.
Mr. Hum: There was the recommendation, which is somewhat of a custom rather than a law in finances, that the marginal tax rate should never exceed 50 per cent. The thinking is that it is unseemly that any Canadian should work and take home less than half their pay. It was not written in the constitution, but that was the rule.
I was at pains to try to explain why the government prefers sometimes lower than 50 per cent and sometimes higher. My only explanation is, am I in Tunney's Pasture or in the Department of Finance because when taxing citizens, the government tries to have low tax rates on the grounds that they do not want to distort or discourage saving, entrepreneurship and work effort. When the government gives money to citizens, although they call it a benefit taxation rate, they want to limit the amount of their generosity, and the way to achieve that is to have a high tax-back rate on their other sources of income, which, for privacy reasons they have no idea what they receive.
Depending on whether they are taking or giving, the government stance is asymmetrical. In these programs, I think the one exception is the one before your committee, which is the GIS. The spectra, the phantom, the fear, the boogeyman is gone that these seniors will somehow withdraw from the labour force in great numbers so that Canada's productivity will plunge, so therefore I think we have some manoeuvre room here, but what you might want to recommend would not possibly fly with the rest of the demographic group. That is a partial explanation.
Senator Cools: Would you like to add to that answer, Mr. Shillington? I have heard many confessions from many different government people who often tell me that sometimes the cost to retrieve $1,000 is maybe $100,000. It is not often we have people before us who have thought about this issue or might attempt to cost it. I am interested in this cost.
Mr. Shillington: I wish I had a better handle on what the actual administrative costs are for GIS. Bill C-36 will make the application process for GIS much easier. That provision was the one good thing about Bill C-36. There were other negatives, but I do not have the time.
The application process will become easier for GIS, and I suspect that the administrative cost for GIS is low once an income tax system is in place because the income tax system collects the information that determines the benefit. Now it is a couple of lines of code on a computer program. If they were to accept my proposal of excluding, they need only change three or four lines, literally, of computer code to give a different amount.
If the alternative is that we mail the GIS cheque and do not claw back at all, the GIS will cost the same as OAS, where roughly the same amount of money is sent to everyone except high income. OAS is $25 billion roughly and GIS is $6 billion. To turn GIS into a universal benefit that is not clawed back from anyone increases the cost by $20 billion. I am sure it does not cost $20 billion to administer, if that is the alternative you contemplate.
Senator Cordy: I thank the four of you this afternoon because you have put a lot of work into your presentations and given us some wonderful recommendations.
Mr. Shillington, I have read through some of the stories you have given us today, and I wonder how one legislates common sense. Senator Callbeck has brought forward an inquiry as to the number of people who do not collect Canada Pension, and yet you tell us that in Quebec, the number not receiving QPP is virtually zero. You have given anecdotal evidence here of people speaking to people within the department. You have given information to Senator Callbeck who is asking questions to a departmental person. The department has all the figures in front of them for Canada Pension and OAS, and yet they are not telling people they are eligible. Some stories in your documentation are sad, where people could have used CPP and OAS. What do we do? Do we legislate that a person on the receiving end of the phone call must give out this information? Is that action really necessary?
Mr. Shillington: You are a parliamentarian; I am not. The department reports to you, and only through you to me. Fortunately for them, they do not report to me.
If you read the brief, you know that in answer to a question last month, it was reported that when somebody phones and applies for old age security, they do not tell them about their Canada Pension Plan, and that is their knowing policy to not tell them. When I appeared a couple of months ago, I told a long story about Ernestine, who applied for Canada Pension Plan at age 91, having applied for old age security, and having applied for CPP survivor benefits because her husband died, so the department had several opportunities. She was receiving OAS. They knew she was eligible for CPP. She did not trip over this eligibility until she was 91. They gave her 11 months of retroactive benefits, and that was it. She lost out on $50,000 before interest, and who knows what after interest.
If I had control of the legislation, I would put in financial incentives. The government pays full retroactive benefits plus interest, if they knew the person was eligible, plus a penalty on the fund. I do not understand the motivation at all.
I ran into this with the GIS story. At that time, 300,000 seniors were eligible for GIS, and it was known who they were. The reason given originally for not telling them was that it would violate their privacy.
The Chair: I thank all of you today. You can be assured that some of your concrete and positive recommendations will find themselves in our report, which we hope to table in an interim form sometime later in March and in a final form, hopefully, sometime in September.
The committee adjourned.