Ensuring the Sustainability of OAS for the Next 100 Years

Ensuring the Sustainability of OAS for the Next 100 Years

This year marks the 100th anniversary of Canada’s first old age pension. A lot has changed in how Canadians live, work, and save since then. Canada’s population is ageing, and Old Age Security (OAS) beneficiaries are rising. In an uncertain economic context, some have wondered whether the current OAS program is one we can afford.

But this question does little to guide an effective policy response. The more crucial question is whether Canada’s overall retirement income system is equitable, adequate, and efficient. Calls to make piecemeal changes to OAS risk far-reaching, unintended consequences across the broader tax and benefit system.

Canadians are living longer and retiring later, but financial realities have shifted. Today, 60% of Canadians lack workplace pensions. Affordability pressures are straining the ability of households to save, putting greater reliance on government-sponsored programs like OAS, the Guaranteed Income Supplement (GIS), and the Canada/Quebec Pension Plan (C/QPP).

While OAS is often cited as the federal budget’s single largest expense, gross figures mask important realities. Because OAS is taxable, $10 billion of its $60 billion expenditure returns directly to federal coffers. Furthermore, as a share of GDP, OAS expenditures are projected to peak around 2030 as the last baby boomers reach eligibility, declining thereafter.

OAS costs must also be weighed against broader returns. Social investments can reduce public spending in other areas, such as health care. Fiscal pressures are further offset by older Canadians working longer and contributing significant volunteer hours to the economy.

While OAS and GIS have significantly reduced absolute poverty, relative poverty metrics reveal a different picture. The Low-Income Measure shows older adults facing higher poverty rates than working-age Canadians. Because OAS is indexed to inflation rather than wage growth, its value erodes relative to broader living standards over time.

As OAS enters its second century, it is natural to consider whether it remains fit for purpose. But the discussion must start from the program’s objective. OAS is the foundation of the retirement income system. It provides the basic income floor based on residency, GIS offers targeted low-income relief, and C/QPP provides earnings replacement.

Proposals to alter OAS typically focus on four levers—eligibility age, income thresholds, clawback rates, and program structure—yet each carries immediate trade-offs.

For example, raising the age of eligibility would impact how low-income adults access GIS and shifts costs to provincial social assistance. Perhaps most importantly, Canada’s longevity dividend is not equally distributed. Not all Canadians are living longer, and not all workers can continue in their profession in their later years. 

Lowering clawback income thresholds increases marginal effective tax rates for middle-income households and, in the extreme, undermines OAS’s purpose as a universal base. Any adjustments to clawback rates can alter retirement savings incentives (RRSPs, RRIFs, workplace pensions) and impact workforce participation.

Altering one component inevitably shifts the entire system. Rather than reactive adjustments, policymakers must reaffirm OAS’s core role, which is clear in both policy and legislation. OAS is, and must continue to be, the stable base upon which individuals build their financial security in their later years.

Given its central role in Canada’s retirement income system, making isolated changes to OAS without understanding the implications for the broader tax and benefit system would be shortsighted.

It’s time to look beyond OAS to ask whether Canada’s retirement income system is meeting both current and future needs. Millions rely on government-sponsored retirement income programs today, or will soon, and younger Canadians need confidence the system will be there for them.

Addressing these questions requires a holistic analysis of the retirement system. Investing time and resources into this is an investment in Canada’s future. Those entering retirement 100 years from now will thank us for it.

This commentary was originally published in The Hill Times.