Trevor Tombe: Why boosting old age security would be a costly mistake

I’ve written about this before, but it’s worth repeating: elderly Canadians have fared better than most others in recent years. Government benefits are already indexed to inflation, and high interest rates benefit those with substantial savings (i.e., most seniors). Adjusted for inflation, households headed by someone over 55 have seen their disposable incomes increase by roughly twice as much since the beginning of 2022 compared to younger households. Income from investments and interest for these older households is way up, while younger households are strained with higher debt costs.

Increasing Old Age Security amounts—at an overall cost of well over $3 billion per year (and rising in the future as our population ages)—would widen the gap further. This is especially true of the many high-income seniors currently receiving OAS, for no clear public policy purpose.

Of course, the cost of this move would not likely be explicit or visible. It would instead simply increase the federal debt. But while hidden from plain view, the fiscal costs are very real.

To get a sense of magnitude, consider an increase in personal income tax rates to fund the expanded OAS benefits.

Historically, this is precisely how such benefits were funded. There used to be an “old age security tax” levied on personal incomes. And when benefits increased, so too did the tax rate.

In 1964, for example, when payments increased by $10 per month (equivalent to roughly $100 per month today), the tax rate increased from 3 percent to 4 percent.^{1The explicit tax to fund old age security payments was eliminated in 1972.} This allowed for the kind of open and honest public debate about costs and benefits that is missing today.

If we took this approach now, I estimate that a 10 percent OAS benefit boost (including for those over 75, which started in 2022) is equivalent to an increase in income tax rates by roughly 0.35 percentage points across the board.

While that may not seem like much, it adds up to between $200 and $400 per year in added costs for working Canadians. For those in their forties with two kids, I estimate the cost would be roughly $500 per year, on average.

One might argue that higher taxes would be in exchange for higher future benefits, so while younger people pay more now, they’ll receive more later. That’s a fair point, but it is hardly a good trade.

For someone aged 35 today who pays more according to the above chart and receives more also according to the above chart, the effective “real return” (that is, adjusted for inflation) on those contributions is only about 1 percent per year if they live until age 85. Not great.

Whether funded through tax increases, higher public debt, or lower spending in other areas, the key point remains: the government’s resources are limited, and every new expenditure has consequences.

Population aging is already reshaping Canada’s fiscal landscape, increasing the costs of health care, pensions, and other age-related expenditures. Without reform, these demographic trends will only exacerbate fiscal pressures. Since 2015, Canada has moved in precisely the opposite direction.

Canada also faces serious economic challenges, and increasing OAS for a generally well-off group would likely worsen the situation by channelling resources toward consumption rather than investment.

What Canada needs are policies that boost productivity, encourage investment, sustain our public finances, and lay the foundation for long-term growth. If the government succumbs to political pressure and increases OAS to avoid an election, it would be a costly mistake—one that their likely successor should reverse.