There are three federal government programs that make sig nificant payments to the elderly in Canada: Old Age Security (OAS); the Guaranteed Income Supplement (GIS); and the Canada Pension Plan (CPP). OAS is a payment to all persons over a certain age, currently age 65. The GIS is a payment to very poor Canadians over 65 who, for whatever reason, have no other sources of retirement income. The Canada Pension Plan acts a bit like a regular pension planthere are payments into the plan and the retiree collects benefits based on the pay- ments. Residents of Quebec participate in the Quebec Pension Plan (QPP) which is similar to the CPP. In 2012, there were almost 5.3 million Canadians over 65 receiving such payments (15.1% of 34.8 million Canadians were over 65 in 2012). This number and percentage is forecast to increase rapidly over the next 30 years. Age-related payments are a very large propor- tion of the federal government's outlays. Age-related government programming faces two critical decisions. What is the usual age when a person receives income from these programs? How are these programs funded? In their Budget on March 29, 2012, the Harper govern- ment announced very substantial changes to the OAS and GIS system. The age of receipt of income from all these programs had been 65 since they started. As of April 2023, the age at which a person receives OAS or GIS will gradually rise from 65 to 67. The change will be fully implemented between 2023 and 2029. If you are born before March 31, 1958; you are not affected by these changes. All persons born after that date will receive benefits over a shorter period of their life. If you are born after February 1, 1962 (most of the readers of this book), then you will not receive your OAS until age 67. The Budget indicated that after discussions with the provinces, payment related to the Canada and Quebec Pension Plans would also start later in life, presumably at age 67, although as of writing. no specific details have been announced. Changing the age of receipt of old-age payment is an important policy change. Canadians will receive taxpayer funded benefits for a shorter period of their life. How will this affect the savings rate? The answer (partly using analysis from Chapter 21) is: We simply do not know! Consider two extreme possibilities. Suppose Canadians continue to plan to retire at 65 but now have no OAS payments from age 65 to 67. To maintain the same level of retirement consumption when they are 66 and 67, they would have to save more when they are working. Savings rates must rise. This would generate a burst of growth starting now. It is also possible that Canadians will now decide to work until they turn 67. Then they have two fewer years of retirement consumption to save for and two additional years of work in which to save. The savings rate might fall and thus reduce growth. The age at which a Canadian receives OAS is a critical component of savings and retirement planning for Canadians. How the policy changes of 2012 will affect the national savings rate remains to be seen. An equally important policy decision in a government- sponsored retirement system is the method of funding retirement income. Here the CPP/QPP and OAS/GIS models are completely different. The OAS/GIS systems taxes workers and distributes the tax contributions as benefits to retirees. Such a system is called a pay-as-you-go system: The system pays benefits out "as it goes," that is, as it collects them in contributions. The CPP/QPP systems tax workers, invest the contribu- tions in financial assets, and pay back the principal plus the interest to workers when they retire. Such a system is called funded: At any time, the system has funds equal to the accumulated contributions of workers, and from which it will be able to pay out benefits when those workers retire. If the system if fully funded, then there are enough assets to pay all of the current and future benefits. From the point of view of retirees, the two systems feel similar, but they are not identical. What the retirees receive in a pay-as-you-go system depends on demographics-the ratio of retirees to workers-and on the evolution of the tax rate set by the system; what they receive in a fully funded system depends on both the contribution rate and the rate of return on the financial assets held by the fund. But, in both cases, they pay contributions when they are employed and receive bene- fits later. In both cases, the contributions are mandatory. From the point of view of the economy, the two systems are very different, however: In a pay-as-you-go system, the contri- butions are redistributed, not invested; in a fully funded system, they are invested, leading to a higher capital stock. So, a fully funded social security system leads to a higher capital stock. The CPP and QPP were pay-as-you go plans when they started. For the first couple of decades of the CPP/QPP sys- tem, retirees received benefits without having contributed for very long. This gift to the initial retirees was widely perceived as fair: These were the generations that had suffered during the Great Depression and World War II. It also was not very costly: The number of eligible retirees was small at the beginning, so the contribution tax rate required to finance CPP pay-as-you- go benefits was low. It is actually quite difficult to know if the CPP and its Quebec counterpart are now fully funded. That is certainly the objective of recent changes to these plans. The CPP and the QPP came into trouble in the 1990s because of demographic changes. Life expectancy and the average length of retirement have steadily increased. The large baby-boom generation is approaching retirement. As a result, the ratio of workers to retirees has steadily decreased and will continue to decrease over the next 50 years. By 2026, Statistics Canada projects that 21% of Canada's population will be over 65 years of age. If CPP (and QPP) contributions had not been increased, there would have been a growing imbalance between benefits and contributions. However, contribution rates were increased over the 1990s. Con- tributions are higher than benefits for the time being. In a change in policy, some of the excess of contributions over benefits is being invested in private sector financial instruments. This part is called the Canada Pension Plan Investment Board, and as of 2012, it held about $161 billion in various stocks, bonds, and real estate. The $161 billion in assets as well as the higher con- tribution rate is projected to maintain a balance between CPP benefits and CPP contributions for the next 75 years. The CPP is now fairly close to a fully-funded system. The OAS/GIS remains a completely pay-as-you-go system. Is a fully-funded government system the best option for retirement savings? This is a controversial issue. One key fact is that all Canadians are required to participate in the Canada or Quebec Pension plans. This would raise savings rates assuming at least some of those Canadians would not choose to save in any other form. If the CPP and QPP make good investments, there is more capital and, in steady state, a higher level of output per person. But suppose that all of the Canadians would privately choose to save exactly what they are required to save in CPP and QPP and put those savings in private pension plans. If those private plans made the same investment decisions as the CPP and QPP, economic growth would be exactly the same. Most economists see some role for a mandatory public plan so that the Canadians who would not choose to save for their retirement do not end life in poverty. Another way to say this-most economists are willing to con- clude a mandatory fully-funded public pension plan raises the national savings rate. FURTHER READINGS Two books that review recent pension policy in Canada are The Future of Pension Policy: Individual Responsibility and State Support, by William B.P. Robson, Publications of the British-North American Committee 41 (London: British North American Committee 1997) and When We're 65: Reforming Canada's Retirement Income System, by John P. Burbidge et al. (Toronto: C.D. Howe Institute, 1996). The website of the C.D. Howe Institute, www.cdhowe.org contains a variety of research on the pension system in Canada. Question 1 According to the article, if the age to receive Old Age Security or the Guaranteed Income Supplement increases from 65 to 67, the policy is likely to the saving rates in Canada. increase decrease has no effect on Question 2 2 pts 6 pts How do the "pay-as-you-go" system and the "fully funded" system differ in their method of funding? Please explain. Question 3 2 pts In a "pay-as-you-go" system, if the share of retirees to workers increases, the payments to the retirees will decrease increase not change Question 4 8 pts At the end of the article, it mentioned that "... all Canadians are required to participate in the Canada or Quebec Pension plans. This would raise savings rates assuming at least some of those Canadians would not choose to save in any other form.... there is more capital and, in steady state, a higher level of output per person." According to our discussion about the saving rate and economic growth, 1. how does mandatory participation in the pension plans affect the growth rate in Canada in the short run (i.e., before the steady state) and in the long run (i.e., in steady state). 2. please explain why output per capita increases in steady state