Session 30 Social Security: Age of Eligibility based on Actuarial Logic Robert L. Brown and Shantel Aris, University of Waterloo
Age of Eligibility (AOE) Defined as the Earliest Age a person can receive full/unreduced Social Security benefits.
AOE Issues Strains on Social Security Life Expectancy keeps rising Baby Boom now retiring Results in Rising Aged Dependency Ratio Aged Population dampens GDP Growth If Age of Eligibility remains at 65, OAS/GIS will rise in cost Is there a way to lower C/QPP Contributions?
Increasing Old-Age Dependency Ratio 0.60 0.50 0.40 0.30 0.20 0.10 0.00 1940 1960 1980 2000 2020 2040 2060 2080 2100 2120 Male Old-Age Dependency Ratio Female Old-Age Dependency Ratio Total Old-Age Dependency Ratio
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 70,000.00 Projected Population Growth 60,000.00 50,000.00 40,000.00 30,000.00 20,000.00 10,000.00 0.00 Observed Low-growth Scenario Medium-growth Scenario High-growth Scenario
Fertility Rates: Canada and U.S. Note: The solid black horizontal line represents the natural replacement population level of 2.1 children per woman. Source: Statistics Canada
Life Expectancy in Canada Year At Birth At Age 65 At Age 75 Male Female Male Female Male Female 1921 58.8 60.6 13.0 13.6 7.6 8.0 1941 63.0 66.3 12.8 14.1 7.5 8.2 1961 68.4 74.2 13.5 16.1 8.2 9.5 1981 71.9 79.0 14.6 18.9 9.0 11.9 2001 76.9 82.0 17.0 20.5 10.3 12.9 2011 79.3 83.6 18.8 21.7 11.8 13.9
Year 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 2061 2063 2065 2067 2069 2071 2073 2075 2077 2079 2081 2083 2085 2087 2089 2091 2093 2095 2097 2099 Projected Population Split by Age Group, 2016 2100, Canada 70,000,000.00 60,000,000.00 50,000,000.00 40,000,000.00 30,000,000.00 20,000,000.00 10,000,000.00 - Population below 20 Population 20-65 Inclusive (Working-age Population) Population over 65 (Old-age Population)
Annual Average Growth Rate, Natural Increase and Migratory Increase per Intercensal Period, Canada, 1851 2061
Mitigating Factor: Average Exit Age from the Labour Force, Canada
Reforming the Age of Eligibility This is a problem of Demographic Origins Thus, seek a Demographic Solution A Common Reform around the world is to Raise the Age of Eligibility as Life Expectancy Rises To Immunize the SSRS from this variance
Reforming the Age of Eligibility Raising the Age of Eligibility has two Impacts: Longer period of Contributions (and Investment Earnings) Shorter Benefit Period Plus a nudge to work longer
AOE Reform in Other Countries Many Examples Exist: Finland Norway Sweden United Kingdom All of these lessen payouts in full for increased longevity Our method would only go part way
Raising the AOE based on Actuarial Logic Inspired by work of Hammond et al (2015) of the Institute/Faculty of Actuaries, UK Set a Criterion that Workers should spend a set proportion of their adult life (age 20+) in Retirement We transferred this Model to the Canadian Context
Canada s Social Security System Canada/Quebec Pension Plan (C/QPP) - Earnings related scheme Canada's Pension System Old Age Security (OAS) -Flat-rate residence based benefit Guaranteed Income Supplement (GIS) -Means-tested benefit
History of the AOE 1927, Old Age Security Act, AOE set at 70 1965, Canada Pension Plan Act Used AE of 65 Lowered AOE for OAS to 65 Introduced the GIS 2012, Harper Gov t. proposed raising AOE for OAS from 65 to 67 between 2023 and 2029 Debate focused on Issues of Sustainability 2016, Trudeau Gov t rescinded this Legislation But No Actuarial Logic
CPP II Introduced in 2016 Full new benefits not payable until 2065 Will be fully funded no Intergenerational Transfers heightens probability of sustainability
Raising the AOE based on Actuarial Logic: Methodology by IFOA Working Party Key Criterion: People Live a Set Proportion of Adult Life in Retirement, Proportion of adult life spent in retirement = Adult Life starts at Age 20 e AOE e AOE + AOE adult life starting age Requires Projections of Life Expectancy Proportion Appropriate for the UK is 33.3% Proportion for Canada is 34% Causes Age of Eligibility to Rise starting in 2026
Age of Eligibility-Canadian Context Wanted to have a 5-year notice period and a 2-year phase in period A 33.3% criterion would require an immediate shift in Age of Eligibility A 34% Criterion causes the Age of Eligibility to rise first in 2025 Since 34% is a Limit that causes a shift, the average period in Retirement is less then 34%
AOE AOE progression and the proportion of adult life spent in retirement, Canada 2010-2055 68 0.4 67 66 0.38 65 0.36 64 63 62 61 0.34 0.32 DWP Ratio AOE Threshold 60 0.3 YEAR
AOE Constant AOE at 65 and the proportion of adult life spent in retirement, Canada 2016-2055 66 0.4 65 0.38 64 0.36 63 62 0.34 DWP Ratio AOE Threshold 61 0.32 60 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 YEAR 0.3
AOE AOE progression (by 6 months) and the proportion of adult life spent in retirement, Canada 2010-2055 67 0.4 66.5 66 0.38 65.5 65 0.36 64.5 DWP Ratio 64 0.34 AOE 63.5 Threshold 63 0.32 62.5 62 0.3 YEAR
AOE progression (by 3 months) and the proportion of adult life spent in retirement, Canada 2010-2055 AOE 67.00 0.40 66.50 66.00 0.38 65.50 65.00 0.36 64.50 DWP Ratio 64.00 0.34 AOE 63.50 Threshold 63.00 0.32 62.50 62.00 0.30 YEAR
1966 Proportion of Adult Life Spent in Retirement, Canada, 1966-2055 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 0.37 0.35 0.33 0.31 Proportion of Adult Life Spent in Retirement (with AOE Shift) Proportion of Adult Life Spent in Retirement 0.29 0.27 0.25
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 0.6 Old-age dependency ratio with shifts in the AOE, Canada 0.5 0.4 0.3 0.2 Total Old-Age Dependency Ratio Total Old-Age Dependency Ratio (with AOE shifts) 0.1 0
Age of Eligibility-Canada OAS, GIS, C/QPP are all sustainable But the cost is high OAS costs peak at 3.1% of GDP in 2030 and fall to 2.7% of GDP in 2050 versus 2.5% in 2017 CPP costs 9.9% of earnings up to the AIW But CPP II will add 2% up to the AIW and 8% above QPP contribution rate to be 10.80% in 2018
Age of Eligibility-Canada CPP Contribution rate would be around 9.5% with our AOE Adjustment QPP Contribution rate could also be reduced by around 0.5% An Automatic AOE adjustment would secure the Sustainability of Canada s Social Security Systems
AOE-Remaining Issues This Adjustment is Regressive since Raising the Age of Eligibility has a greater impact on those with Lower Life Expectancy--those with Lower Income GIS clawback is even more Regressive, so Connect an Age of Eligibility Adjustment to a change in GIS clawbacks
Conclusion Healthy Life Expectancy is Rising as Quickly as Overall Life Expectancy Canadians can work a little longer and have been since Y2000
Conclusion Average Exit Age from the Labour Force, Canada