Chapter 5 From pension policy to retirement policy: Towards a new social agenda?

Introduction
Recent pension politics
Why Canada is different
New drivers: toward retirement politics?
Effective levers
Conclusion
Bibliography

Introduction

Pension policy has to do with the ways we design and finance the accumulation of our pension benefits, the wealth that will get us through our retirement years. Retirement policy has to do with the age of eligibility and other requirements that regulate when and how we can access this wealth. Pension policy has been on the Canadian political agenda several times since the 1980s. In contrast, we have had relatively little discussion of retirement policy. The exception was the 1987 reform when we liberalized retirement rules and lowered the age for early access to the Canada and Quebec Pension Plans (C/QPP) to age 60.

The question I ask here is whether all this is about to change? Will retirement policy become the target of reform over the next decade in the same way that pension policy was in the last? There are some indications that this may be about to happen. Though the public debate on retirement age is yet to appear in Canada, Peter Hicks, recently back in Canada from the Organization for Economic Cooperation and Development (OECD) and now an Assistant Deputy Minister with Social Development Canada, has argued forcefully in Preparing for Tomorrow's Social Agenda (2002) that the politics of work and retirement will emerge as the major policy driver of Canadian social policy in the next five to eight years. But where will the political pressure and the political coalitions necessary to push forward reform to our retirement rules come from? Since I can't answer this question directly - I can't predict the future-I approach it indirectly; by revisiting the politics of the recent past which have mainly concerned pension policy not retirement policy.

Recent pension politics¹

Pension politics have been big business and a political hot spot in most rich democracies for the past two decades. Margaret Thatcher was among the first out of the gate with her reform of State Earnings Related Pension Scheme (SERPS), the British analogue of the C/QPP, in 1986. Because of her high profile, pension reform is often associated with a right wing assault on the welfare state. The truly big reforms of the 1990s, however, came not from the right but from the left - in Sweden under the Social Democrats in 1998 and in Italy by means of a pact ratified by organized laborur in 1995.

In Canada, by contrast, the past two decades of pension politics can be summed up in two, or maybe three words: (almost) nothing happened.

• The notorious "clawback" on Old Age Security (OAS) benefits introduced by the Mulroney government has never touched more than five5 percent of Canada's elderly population. And it was effectively de-fanged with the return to full indexing of the cut-off point under the Liberals in 2000.
• The proposal to fold OAS and Guaranteed Income Supplement (GIS) into a single income-tested Seniors Benefit unveiled in the 1996 budget soon faded into history, shot down by critics from both the left and the right.
• Amidst the usual rhetoric of "unsustainability,", the Canada Pension Plan was put on the reform agenda in the mid-nineties1990s. The results were equally modest and served mainly to maintain the status quo. Contribution rates were raised but by and large the traditional benefit package remained intact.

From the vantage point of retirees, the system in place today scarcely differs from the design that was in place in 1980. Canadian pension politics have been decidedly tranquil compared say to France, Germany, Italy or Sweden.

Given our recent history with the reform of pension benefits -- nothing much happened --- we might reasonably ask why we should expect the future of retirement policy to be any different? To answer the question, I will begin by reviewing some of the reasons for the relative tranquility in Canadian pension politics over the past few decades compared to other countries.

Why Canada is different

There are a number of reasons why pension reform has been a much less pressing issue in Canada than elsewhere and we begin with the most obvious.

a) Less fiscal pressure

The main driver of reform in the 1990s was pressure on public finances. While Canada's actual and projected spending on pensions in the mid-1990s was somewhat higher than in some other English-speaking countries it was considerably lower than in most European countries (Table 5.1).²

b) Early retirement less popular

In a number of countries, and especially in Continental Europe, labourlabor market conditions in the 1970s led to the view that early labor market exit by older workers was a socially and economically acceptable alternative to high unemployment among younger workers. Pension systems were often used as pseudo-unemployment schemes and unemployment and disability programs came to serve as pseudo-pension plans. The result is what Guillemard (2001) has called a downward spiral in the expectations and practisespractices of both firms and workers. To use the Canadian expression, "Freedom 55" became the new benchmark of a successful life course and both employers and workers began to define age fifty-five55 as the "'normal' agenormal" age for definitive withdrawal from the labourlabor market. Canada, however, did not pursue such a strategy and, as a result, the downward spiral in the Canadian retirement age stopped well short of the levels reached in Continental Europe (Table 5.2).

c) Financing Mechanisms

Less obvious, perhaps, is the role of the financing mechanism - the composition of the tax budget used to finance pensions. The major pressure for pension reform in countries like Italy, Sweden, France and Germany was not rising taxes per se but the prospect of high and rising payroll taxes to meet future pension expenditures. Germans, for example, were paying 22%percent of covered wages and this figure was projected to rise to 38percent% under the status quo.

In Canada, in contrast, the payroll contribution rate for CPP was projected to peak at 14.2%, prior to the 1997 reform, a figure that would have had most European treasury officials breaking out the champagne. The current projected rate (post-reform) of 9.8% would leave them delirious. A major reason for this difference between Canada and most other countries is the fact that we finance a much larger share of our pension budget - about half - from general revenue, a feature that makes Canada an outlier among OECD countries, even in comparison to the U.S.

What's the big problem with payroll taxes? The payroll tax is a flat tax, usually with a wage ceiling that makes it regressive. Unlike income taxes, there are no exemptions and no allowances for family size. Low-wage workers and especially younger families with children typically bear a disproportionate share of the cost as a result. These distributive effects on working -age families are compounded to the extent that high payroll taxes discourage employment at the lower end of the labor market.

In effect, charging all of the costs of population ageing -- a term I will define shortly --- to the working-age population via a payroll tax creates a huge problem not only of intergenerational equity but also of intra-generational justice within the working- age population since the distribution of the additional costs in no way reflects ability to pay.

Although earmarked payroll taxes have historically been more popular than income or consumption taxes, by the 1990s they were becoming a real target of concern. Union leaders in countries like Sweden, Italy and Germany, really did face an intergenerational trade-off between their retired members and their working members. Ever-rising payroll taxes created the likely scenario that take-home pay among working-age families would fall relative to pensioner incomes. The upshot was the emergence of unexpected political coalitions among labour leaders, government and business to stablize payroll taxes at current levels. This was done with a variety of changes not only to the benefit structure but also by shifting some of the financing burden away from payroll taxes to general revenue financing. In a sense they were moving closer to the Canadian model.

d) Federalism and the politics of blame avoidance

The standard conclusion on pension reform is that governments rarely impose pension cutbacks unilaterally, that is without first generating a broad political consensus. When governments expand benefits, they like to claim credit for their actions. But when cutbacks are involved, they like to spread the blame around; a pattern Kent Weaver (1986) has called the "politics of blame avoidance."

The usual way of solving the "blame avoidance" problem is to get other key political actors to sign on to the reform so that responsibility is shared among them. The mix of political actors who sign on to the new social contract depends on national institutions of political representation. In some countries, it means negotiating all-party agreements as occurred in the U.S. in 1983 or in Sweden in 1994. Elsewhere it involves obtaining the consent of organized labourlabor and employer associations or even holding a national referendum.

Here in Canada, federal-provincial agreements play a similar role. Federal-provincial consensus is a formal requirement in the case of the CPP and undoubtedly acts as a background constraint in the case of programs like OAS. In the case of the CPP reform, the Province of Quebec made it clear in its white paper that it would oppose any significant benefit cuts. And they would be backed by Saskatchewan and British Columbia, then ruled by the New Democrats. Quebec's stance effectively removed the option of drastic erosion of CPP from the menu of possible options during the 1990s.

e) The moral economy of pension reform

In the mid-nineties1990s, there were calls from both the Fraser Institute and the C.D. Howe Institute to privatize the C/QPP. But most people weren't listening, not even on Bay Street, the financial hub of Canada.. As one senior federal official who was part of the process suggested to me:

One of the reasons for this frame of mind has to do with the moral economy of pension reform.

During the 1980s and 1990s, the intergenerational equity debate provided U.S. critics of Social Security with a potent source of moral critique of the existing system. Child poverty was still on the rise while, it was claimed, an increasingly affluent elderly population was frolicking on the beaches of Florida financed by their Social Security checks. These kinds of arguments were occasionally heard in Canada but gained little political leverage. This difference has more to do with material than with any cultural differences between the two countries.

As in the U.S., average incomes among Canadian seniors did rise sharply from the 1970s to the 1990s and low-income rates among Canadian seniors are now among the lowest in the OECD, even when compared to egalitarian Sweden (Hauser 1997; Smeeding and Sullivan 1998).³ But, in Canada, it would be difficult to make the claim that this was because the elderly were becoming "too rich."

In 1980, about 40% of all elderly persons were in the bottom income quintile, twice the rate for the population as a whole (Table 5.4). By 1995, about 17% of the elderly were in the bottom quintile, somewhat below the level of 20% for the entire population. But 80% of the shift out of the bottom quintile reflected movement into the second and third quintiles. There was little increase in the proportion of seniors in the top two quintiles. While Canadian retirees were less poor, they weren't getting rich.

The reason for this outcome is built into the design of the Canadian pension system. In practisepractice, the end result of adding GIS and C/QPP in the 1960s to the original flat benefit OAS established in the 1950s was simply to produce, on average, an enriched flat benefit system that is highly redistributive (Table 5.5).

On a pretax basis, average transfers (Table 5.5, column 5) to the elderly were between eleven and twelve thousand dollarsdollars ($11,000 to 12,000) in 1995 and more or less identical across income quintiles. Post-tax (Table 5.5, column 6), the overall impact was redistributive. These are dollars adjusted with an equivalence scale to take account of differences in family size. To put these amounts in perspective, in 1995, average equivalent adjusted income among the elderly was about $23,000.

Quite simply then, the pressures that put big pension reform at the top of the political agenda elsewhere were weak or absent in Canada. And not much happened.

New drivers: toward retirement politics?

Hicks (2002) identifies two major new drivers of policy reform that are likely to kick in over the next decade or so: (1) the declining ratio of producers to consumers associated with low fertility and population aging; and (2) the changing retirement incentives and the lifetime reallocation of work and leisure associated with increases in longevity.

The implication of the first point is that attention will shift from solving the public finance problems that are relatively modest given the design of Canada's public pension system to the more serious macroeconomic consequences of population ageing that Canada shares with other affluent democracies.

The second point is social and normative. In essence, Hicks argues that while people do enjoy their retirement years, it goes on too long. With continued improvements in health and longevity, pressures for a more rational reallocation of work and leisure will grow. Much of the time spent in retirement, he argues, is passive, unhealthy and unwanted.

Both pressures, he concludes, will put pension reform on the agenda again but with a difference. The public discussion he calls for will focus less on benefit design and financing mechanisms and more on the retirement age. Rather than the "politics of pensions," the next round of reform will focus squarely on the "politics of retirement." Let'sretirement". Let's begin with the first claim: that the macroeconomic consequences of population ageing rather than pressures on the public budget will make retirement a major policy driver.

The conclusion that the changing ratio of producers to consumers is the big issue and the impact on the public budget is only a derivative problem is undoubtedly correct. To illustrate consider the following identity that I have adapted from Thompson (1998). The cost of supporting the retired population for the economy as a whole is simply the fraction of each year's economic activity given over to supplying the goods and services the retired consume or:

which in turn, following Hicks, can be written as:⁴

Assuming all else remains fixed, population ageing raises total retirement costs and it matters little whether these costs appear on the public or private side of the national ledger.⁵

The accounting equation is useful since it points to the range of strategies available for limiting the additional growth in retirement costs.

1. Maximize employment levels among the "working- age" population.
2. Reduce the number of retirees (by raising the average retirement age).
3. Reduce the consumption of retirees.
4. Increase productivity.

Strategies b and c provide levers that are most immediately available to policymakers and the emergent consensus tends to favourfavor keeping people at work longer rather than cutting benefits. The reason is transparent from the accounting equation: An increase in the retirement age changes both the numerator and the denominator of the retiree/employee ratio while a reduction in benefits affects only the numerator of the consumption ratio. Simulations for a 'stylized' OECD country indicate a 5per cent% reduction in the number of beneficiaries-equivalent to an effective rise in the retirement age of 10 months-is equivalent to a 10%per cent cut in average retirement benefits.

The unanswered question, however, is whether the appeal of the strategy is sufficient to make it into a major "policy driver." The question is not whether this should happen but whether it will happen, a question for political not normative analysis. Where will the political pressures and the political coalitions required to sustain policy reforms that might lead to later retirement come from?

Effective levers

One might begin by raising the age of CPP eligibility from 60 to 62 or even back to 65. Such a reform would undoubtedly help with the public finance problem but its impact on the underlying macroeconomic problem is less clear. The main effects of CPP changes would be experienced by lower- wage and presumably, lower --productivity workers for whom the C/QPP constitutes a large share of retirement income. The incentives to remain in the labourlabor force for higher wage, higher productivity, workers whose retirement wealth is mainly from private plans and accumulated assets would be much less. From a purely distributive point of view, getting low- income workers, who also have shorter life expectancies, to work longer hardly satisfies anyone's criterion of distributive justice.⁶

Moreover, if the real aim is to solve the macroeconomic problem, it is the better- educated, healthier, higher wage and more productive employees that we would like to work longer. To achieve this objective the most important and potent levers of reform are the rules governing the age and conditions under which they gain access to the most significant part of their retirement wealth, namely occupational pensions (RPPs) and personal retirement accounts (RRSPs). There is no normative reason not to do so. The large tax subsidies available to these programs clearly warrant that they too be charged with social goals. But where will the political demand and the political coalitions required to sustain such reforms come from? There is strong historical precedent for managing public sector plans such as the C/QPP to achieve collective goals. But there is no comparable political legacy or practical experience with targeting these quasi-private pension institutions for similar purposes.

Perhaps the political problem will be self-correcting in the sense that political pressure will come from "below." Hicks (2002) suggests that much of the time spent in retirement, is passive, unhealthy and unwanted. With continued improvements in health and longevity, pressures for a more rational reallocation of work and leisure will grow. This would be a remarkable turnaround from past experience. As Burtless and Quinn (2001:385) conclude, the "simplest and probably most powerful explanation for earlier retirement is rising wealth". National GDP in the affluent democracies has grown dramatically in the last half century and some of this increase has been used to purchase more years of retirement. And as Schellenberg'sas Schellenberg's (2004) recent study highlights this has not changed: retirement planning is mainly driven by money. Older workers make it clear that decisions to continue working are mainly the result of limited financial resources.

The dilemma for the future is that the better educated among us, those with the greatest life expectancy, and presumably the most able to contribute to wealth production, are also the most likely to continue to be well positioned to retire early. While working years and working hours have declined for individual workers, they have risen for families, a result of higher women's participation. The increase in "family" years and hours worked helps pay for more years of retirement. The question of who is likely to retire early or late is also changing as a result of increased marital homogamy - the tendency of like to marry like. Rising education levels among the young and higher female employment have had unintended consequences for the structure of family inequality. Well-educated men and women tend to marry one another, forming families where both partners have a high probability of being employed full time and at good salaries. Less well-educated couples face a greater risk of nonemployment and lower salaries when they do work. This is part of the explanation for the growing polarization in the distribution of working time, earnings and wealth accumulation among families.

Recall that the main objective is not simply to reallocate work and leisure over the life course but to change the balance of work and leisure in favourfavor of more work. I am not opposed to more work. Since I am not an economist, I am under no obligation to define human beings as consumers of utilities and work as a disutility. Like Aristotle, Aquinas and Marx I think work is good. As the Benedictines say, laborare est orare - to work is to pray. Nor is there anything new about social policy strategies that give top priority to high employment. We tend to forget that the first objective of Keynes, Beveridge, the Swedish social democrats and other reformers in the 1940s was full employment. Full employment was the precondition for a luxurious welfare state. The issue is about politics not about who is correct on normative grounds. So is there a way out?

The OECD (2001) and Hicks (2002) cite a fascinating result that suggests one potent strategy. Though most people are opposed to legislating later retirement, the majority of actual retirees indicate that their preferred status would be to have part- or even full-time employment. The authors (OECD 2001:82) conclude that the explanation for this apparent contradiction is that retirees "were likely thinking of hypothetical, highly desirable jobs that were particularly suitable for them-ones that are in limited supply for most people." In effect, if we want more work then we have to go to the heart of the matter and start thinking seriously about improving the quality of work and employment. We have worried a lot about making employees more attractive to employers in recent years by emphasizing social investment in education and training. If population aging and a falling labourlabor supply leads employers to think more seriously about making jobs more attractive not only for older workers, but also for younger workers, for women and immigrants, the result will be positive for everyone, a truly positive-sum solution to the challenges of adapting to an aging society.

Conclusion

By the mid-1990s, the average retirement age of Canadian workers had fallen to about 60. The unanswered question is whether the aging of Canada's population over the next quarter century will create the necessary conditions to drive the retirement age back towards age 65 or even higher?. Politics and public policy are one avenue towards this result. Governments have two strategies to pursue. The first involves raising the age at which employees can first access their C/QPP benefits, currently set at age 60. The second requires new policies to regulate the age at which workers can access their occupational plans (RPPs) and personal retirement accounts (RRSPs). Reforming the C/QPP is certainly within the range of political possibility but, since the impact would be felt mainly by workers in the bottom half of the earnings distribution, the macroeconomic payoff is likely to be modest and the distributive impact judged to be less than fair. Higher wage earners depend more on RPPs and RRSPs to provide their retirement incomes. Since these savings receive substantial public subsidies via the tax system, there is no reason that such programs should not be required to help achieve desirable social goals. However, there is little historical precedent for regulating these quasi-private financial vehicles to achieve collective goods.

All this is not to say that new legislative initiatives on either front are politically impossible. But it does imply that placing retirement policy at the centre of a "a "new social agenda" will prove to be politically difficult. Social policy reform is a locus classicus for the study of what political scientists call "path dependent" change, processes in which choices made in the past systematically constrain the choices open in the future (Myles and Pierson 2000). A distinguishing feature of pension reform, for example, is that only rarely does reform come about through a process of unilateral legislation by the government of the day. All-party agreements, referenda requiring the consent of the "people", or corporatist "social pacts" involving organized labor and employers' associations are the rule rather than the exception so that "negotiated settlements" are the usual political mechanism for redesigning pension policies. In Canada, such settlements are typically reached in the domain of federal-provincial relations. Retirement policy is unlikely to be the exception. Barring a truly large exogenous shock such as long- term economic decline, it is difficult to imagine where a new political consensus sufficient to drive a new federal-provincial social agenda will come from.

The more likely prospect is that pressures for change will come from the market as employers respond to a falling supply of younger works with wage incentives and steps to improve working conditions for older workers.

Bibliography

Barr, Nicholas. 2001. The Welfare State as Piggy Bank: Information, Risk, Uncertainty and the Role of the State. Oxford. Oxford University Press.

Béland, Daniel and John Myles. 2005. "Stasis amidst change: Canadian pension reform in an age of retrenchment." Pp. 252 to 272 in Ageing and Pension Reform around the World. Giuliano Bonoli and Toshimitsu Shinkawa (eds.). Cheltenham. Edward Elgar.

Burtless, Gary and Joseph Quinn. 2001. "Retirement trends and policies to encourage work among older Americans." Pp. 375 to 416 in Ensuring Health and Income Security for an Aging Workforce. Peter Budetti, Richard Burkhauser, Janice Gregory and H. Allan Hunt (eds.). Kalamazoo, MI. Upjohn Institute.

Guillemard, A-M. 2001. Continental Welfare States in Europe Confronted with the End of Career Inactivity Trap: A Major Challenge to Social Protection in an Aging Society. Paper presented to the conference on Rethinking Social Protection. Center for European Studies. Harvard University.

Hauser, Richard. 1997. Adequacy and Poverty among the Retired. Paris. Organization for Economic Cooperation and Development.

Hicks, Peter. 2002. Preparing for Tomorrow's Social Policy Agenda. New Priorities that Emerge From an Examination of the Economic Well-being of the Working-Age Population. Ottawa. Social Development Research and Demonstration Corporation.

Myles, John. 2000. "The maturation of Canada's retirement income system: income levels, income inequality and low income among older persons." Canadian Journal on Aging. 19:287 to 316.

Myles, John and Paul Pierson. 2000. "The comparative political economy of pension reform." In The New Politics of the Welfare State. Paul Pierson (ed.). Oxford. Oxford University Press.

Organization for Economic Cooperation and Development (OECD). 2001. Aging and Income: Financial Resources and Retirement in 9 OECD Countries. Paris. OECD.

Schellenberg, Grant. 2004. The Retirement Plans and Expectations of Non-Retired Canadians Aged 45 to 59. Ottawa. Statistics Canada.

Smeeding, Timothy and Dennis Sullivan. 1998. Generations and the Distribution of Economic Well-Being: A Cross-National View. Working Paper Series, no. 173. Luxembourg Income Study.

Thompson, Lawrence. 1998. Older and Wiser: The Economics of Public Pensions. Washington. The Urban Institute.

Weaver, R. Kent. 1986. "The Politics of Blame Avoidance." Journal of Public Policy. 6:371 to 398

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Notes

1. More technical presentations of the arguments concerning the politics of pension reform made here can be found in Myles and Pierson (2000) and Béland and Myles (2005).
2. Throughout the paper, I rely on data for the mid-1990s since they capture the historical context during which most pension debates and actual reforms occurred both in Canada and Europe.
3. By the usual international standard, low-income rates among Canadian seniors had fallen to about 5% in 1994 compared to a U.S. rate in excess of 20%. And among the population 70 and above, Canada's low-income rate was below that of Sweden, the usual "winner" in the international league tables on povery reduction (Smeeding and Sullivan 1998).
4. Peter Hicks, personal communication, December 2001.
5. Public and private pensions are simply alternative ways for working-age individuals to register a claim on future production (Barr 2001). The share of total consumption of the retired rises irrespective of whether it is financed with state pensions or with investment returns from bonds and equities. Indeed, as Thompson (1998:44) observes, proposals to shift towards group or personal advanced funded accounts are often made on the grounds that retirees will receive higher return from their contributions. If this turns out to be true, the effect of change will be to raise future retirement costs.
6. In nations like Germany, Italy or Sweden where most pension "wealth" is stored up inside public sector schemes and the role of occupational and personal retirement accounts is modest, the distributive issue is less severe.