Actuarial Report (11th) Supplementing the Actuarial Report on the Old Age Security Program

18 July 2012

The Honourable Diane Finley, P.C., M.P.
Minister of Human Resources and Skills Development Canada
House of Commons
Ottawa, Canada K1A 0G5

Dear Minister:
In accordance with section 4 of the Public Pensions Reporting Act, which provides that the Minister shall cause the Chief Actuary to conduct an actuarial review when an amendment is made to the Old Age Security Act that affects the cost of benefits, I am pleased to submit the 11th Actuarial Report on the Old Age Security Program.
Yours sincerely,
Signature
Jean-Claude Ménard, F.S.A., F.C.I.A.
Chief Actuary

I. Executive Summary

This is the 11th Actuarial Report on the Old Age Security (OAS) Program since the inception of the Old Age Security Act in 1952. It has been prepared in compliance with section 4 of the Public Pensions Reporting Act (PPRA), which provides that:

This is the 11th Actuarial Report on the Old Age Security (OAS) Program since the inception of the Old Age Security Act in 1952. It has been prepared in compliance with section 4 of the Public Pensions Reporting Act (PPRA), which provides that:

Where an amendment is made to a pension plan referred to in subsection 3(1) and the amendment affects the cost of benefits or creates an initial unfunded liability, the Minister shall cause the Chief Actuary to conduct an actuarial review of the plan as of the effective date of the amendment.

The previous actuarial report on the OAS Program, the 10th Actuarial Report Supplementing the Actuarial Report on the Old Age Security Program as at 31 December 2009, was prepared pursuant to section 4 of the PPRA to show the effect of the top-up of the Guaranteed Income Supplement (GIS) and Allowance benefits, effective 1 July 2011, on the long-term financial status of the OAS Program. The 10th Actuarial Report was tabled in the House of Commons on 4 November 2011. Pursuant to section 4 of the PPRA, this 11th Actuarial Report has been prepared on the basis of the 10th Actuarial Report to show the effect of Part 4 of Bill C-38 on the long-term financial status of the OAS Program.

Bill C-38, An Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, was tabled in the House of Commons on 26 April 2012 and received Royal Assent on 29 June 2012. Part 4 of Bill C-38 amends the Old Age Security Act to gradually increase the age of eligibility for the basic OAS pension and GIS benefits from 65 to 67, commencing 1 April 2023 with full implementation by January 2029. The ages at which the Allowance and Allowance for the Survivor benefits are provided will increase in line with the eligible age for the OAS pension and GIS benefits, from between 60 and 64 to between 62 and 66, starting in April 2023.

To improve flexibility and choice in the OAS Program, the Government will also allow for the voluntary deferral of the OAS pension, for up to five years, starting on 1 July 2013. This will give individuals the option to defer take-up of their OAS pension to a later time and subsequently receive an actuarially-adjusted higher pension. For example, individuals could continue to work longer and defer taking up their OAS pension beyond age 65, resulting in a higher annual pension starting in a subsequent year. The deferred pensions will be actuarially adjusted upward by 0.6% per month for each month after the first eligible age. GIS and Allowance benefits will not be provided on an actuarially adjusted basis.

In addition, the Government will improve services for seniors by putting in place a proactive enrolment regime that will eliminate the need for many seniors to apply for the OAS pension and the GIS. This measure will reduce the burden on seniors of completing application processes and will reduce the Government's administrative costs. Proactive enrolment will be implemented in a phased-in approach from 2013 to 2016.

A. Main Findings

  • Prior to the increase to the age of eligibility, projected total Program expenditures are respectively $32 million and $102 million lower in 2013 and 2022 than under the 10th OAS Program Actuarial Report. During this period, it is assumed that 5 percent of individuals turning 65 will voluntarily defer receiving their OAS pension in exchange for an actuarially-adjusted higher pension. As such, this will result in initial net savings to the OAS Program, which will be offset in the future by higher costs associated with providing a higher pension to those who deferred.
  • Between 2023 and 2030, as a result of the gradual increase in the age of eligibility from 65 to 67 and the voluntary deferral, the projected total Program expenditures will be reduced by $526 million in 2023 and $10.8 billion in 2030 as compared to the 10th OAS Program Actuarial Report projections.
  • By 2030, the projected numbers of OAS and GIS beneficiaries are respectively lower by about 1 million and 230,000 compared to the 10th OAS Program Actuarial Report.
  • By 2030, it is projected that between 550,000 and 1.1 million beneficiaries will be receiving a higher OAS pension as a result of the voluntary deferral, with corresponding increases in their pensions of between $475 million and $967 million.

II. Introduction

This report has been prepared in compliance with section 4 of the Public Pensions Reporting Act, which provides that:

Where an amendment is made to a pension plan referred to in subsection 3(1) and the amendment affects the cost of benefits or creates an initial unfunded liability, the Minister shall cause the Chief Actuary to conduct an actuarial review of the plan as of the effective date of the amendment.

The previous actuarial report on the OAS Program, the 10th Actuarial Report Supplementing the Actuarial Report on the Old Age Security Program as at 31 December 2009, was prepared pursuant to section 4 of the PPRA to show the effect of the top-up of the GIS and Allowance benefits, effective 1 July 2011, on the long-term financial status of the OAS Program. The 10th Actuarial Report was tabled in the House of Commons on 4 November 2011. Pursuant to section 4 of the PPRA, this 11th Actuarial Report has been prepared on the basis of the 10th Actuarial Report to show the effect of Part 4 of Bill C-38 on the long-term financial status of the OAS Program.

III. Description of Part 4 of Bill C-38

Bill C-38, An Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, was tabled in the House of Commons on 26 April 2012 and received Royal Assent on 29 June 2012. Part 4 of Bill C-38 amends the Old Age Security Act to gradually increase the age of eligibility for the basic OAS pension and GIS benefits from 65 to 67, commencing 1 April 2023 with full implementation by January 2029. The ages at which the Allowance and Allowance for the Survivor benefits are provided will increase in line with the eligible age for the OAS pension and GIS benefits, from between 60 and 64 to between 62 and 66, starting in April 2023.

To improve flexibility and choice in the OAS Program, the Government will also allow for the voluntary deferral of the OAS pension, for up to five years, starting on 1 July 2013. This will give individuals the option to defer take-up of their OAS pension to a later time and subsequently receive an actuarially-adjusted higher pension. For example, individuals could continue to work longer and defer taking up their OAS pension beyond age 65, resulting in a higher annual pension starting in a subsequent year. The deferred pensions will be actuarially adjusted upward by 0.6% per month for each month after the first eligible age. GIS and Allowance benefits will not be provided on an actuarially adjusted basis.

In addition, the Government will improve services for seniors by putting in place a proactive enrolment regime that will eliminate the need for many seniors to apply for the OAS pension and the GIS. This measure will reduce the burden on seniors of completing application processes and will reduce the Government's administrative costs. Proactive enrolment will be implemented in a phased-in approach from 2013 to 2016.

Table 1 presents the scheduled increase in the ages of eligibility for OAS Program benefits.

Table 1 Increase in OAS Program Ages of Eligibility
Basic OAS Pension and GIS
Month of Birth Year of Birth
1958 1959 1960 1961 1962
January 65 65 + 5 mo 65 + 11 mo 66 + 5 mo 66 + 11 mo
Feburary-March 65 65 + 6 mo 66 66 + 6 mo 67
April-May 65 + 1 mo 65 + 7 mo 66 + 1 mo 66 + 7 mo 67
June-July 65 + 2 mo 65 + 8 mo 66 + 2 mo 66 + 8 mo 67
August-September 65 + 3 mo 65 + 9 mo 66 + 3 mo 66 + 9 mo 67
October-November 65 + 4 mo 65 + 4 mo 66 + 4 mo 66 + 10 mo 67
December 65 + 5 mo 65 + 11 mo 66 + 5 mo 66 + 11 mo 67
Allowance (Regular and Survivor)
Month of Birth Year of Birth
1963 1964 1965 1966 1967
January 60 60 + 5 mo 60 + 11 mo 61 + 5 mo 61 + 11 mo
Feburary-March 60 60 + 6 mo 61 61 + 6 mo 62
April-May 60 + 1 mo 60 + 7 mo 61 + 1 mo 61 + 7 mo 62
June-July 60 + 2 mo 60 + 8 mo 61 + 2 mo 61 + 8 mo 62
August-September 60 + 3 mo 60 + 9 mo 61 + 3 mo 61 + 9 mo 62
October-November 60 + 4 mo 60 + 4 mo 61 + 4 mo 61 + 10 mo 62
December 60 + 5 mo 60 + 11 mo 61 + 5 mo 61 + 11 mo 62

IV. Financial Status

A. Data, Assumptions, and Methodology

The financial projections presented in this report are based on OAS beneficiaries data provided by Service Canada and the same actuarial assumptions and methods as per the 10th Actuarial Report Supplementing the Actuarial Report on the Old Age Security Program as at 31 December 2009. The projections were then modified to reflect changes to the OAS Program included in Part 4 of Bill C-38.

For each month of deferral, an OAS pension will be increased by an actuarial adjustment factor of 0.6% up to a maximum increase of 36% over the maximum deferral period of five years (up to the maximum age of 70).Footnote1 Following the increase to the age of eligibility, individuals will still be able to defer their OAS pension for up to 5 years beyond the age of eligibility. Once the age increase is fully implemented by 1 January 2029, the maximum age for the deferral will be 72. Table 2 shows pension increases for voluntary pension deferrals based on different first ages of eligibility.

The actuarial adjustment factor of 0.6% per month was derived to achieve actuarial neutrality for the OAS Program based on an aggregate approach and taking into account demographic and economic factors such as life expectancies and long-term interest rates. Actuarial neutrality is discussed further in the section B – Results of this report.

Table 2 Increases to the OAS Pension for Voluntary Pension Deferrals
Take-up Age Age of Eligibility is 65 Age of Eligibility is 66 Age of Eligibility is 67
65 0.0% n/a n/a
66 7.2% 0.0% n/a
67 14.4% 7.2% 0.0%
68 21.6% 14.4% 7.2%
69 28.8% 21.6% 14.4%
70 36.0% 28.8% 21.6%
71 36.0% 36.0% 28.8%
72 36.0% 36.0% 36.0%

Footnotes

Footnote 1

Those individuals who qualify for a partial OAS pension and choose to defer take-up will receive the maximum of their actuarially adjusted pension and the amount of the partial pension determined at the time their application is approved.

Return to footnote 1 referrer

The assumptions regarding OAS Program pension take-up rates have been modified to reflect the introduction of the voluntary deferral of the OAS pension. As shown in Table 3, it is assumed that the OAS pension take-up rates will decrease by 5 percentage points at the first eligible age. With the voluntary deferral, take-up at the first eligible age is assumed to be 91.5%, compared to 96.5% without this initiative (as outlined in the 10th OAS Program Actuarial Report). Furthermore, as a result of the voluntary deferral, it is assumed that the take-up rate increases by 2.5 percentage points one year after the first eligible age, 1.5 percentage points two years after, and by 1 percentage point three years after the first eligible age.

A five percentage point shift in the take-up rates is similar to the post-65 take-up rates observed for both the Canada Pension Plan and Québec Pension Plan. In addition, deferral of pension take-up reflects that labour force participation rates of both males and females aged 65 to 69 have significantly increased over the past ten years. However, there remains uncertainty about how many individuals will defer their benefit past the first age of eligibility. The actual effect of voluntary pension deferral on OAS pension take-up rates will be observed after this option becomes effective in July 2013. Accordingly, the assumption regarding the change in benefit take-up rates due to pension deferrals will be revised in future actuarial reports.

As the eligible age for the OAS pension increases, all other individuals (those who do not defer) are assumed to either start their benefits at their new eligible age or wait to start their pension for other reasons, such as to accumulate additional years of residency and thereby qualify for a full pension. Table 3 shows the assumed take-up rates based on the age of eligibility.

Table 3 Assumed OAS Pension Take-Up Rates
Take-up Age As per 10th OAS Program Actuarial Report(Age of Eligibility is 65) Modified Take-Up Rates Due to Pension Deferrals
Age of Eligibility is 65 Age of Eligibility is 66 Age of Eligibility is 67
65 96.5% 91.5% n/a n/a
66 0.6% 3.1% 91.5% n/a
67 0.4% 1.9% 3.1% 91.5%
68 0.4% 1.4% 1.9% 3.1%
69 0.3% 0.3% 1.4% 1.9%
70+ 1.8% 1.8% 2.1% 3.5%

The proactive enrolment regime will remove the requirement for many seniors to apply for their OAS and GIS benefits. Seniors who are eligible for proactive enrolment will be notified, while others who cannot be enrolled will be sent applications. For the purpose of this report, it is assumed that proactive enrolment will have no effect on benefit take-up rates or expenditures, since it is assumed that those seniors who are eligible for proactive enrolment would have otherwise applied for their benefits. In addition, in the absence of information regarding the costs associated with implementing the regime, no associated administrative costs are assumed. Once the proactive enrolment regime is implemented and as experience develops, the assumptions regarding the impact on benefit take-up rates and total expenditures will be reviewed and revised accordingly in future actuarial reports.

As was assumed under the 10th OAS Program Actuarial Report, administrative expenses are assumed to be 0.35% of total annual benefit payments. As a result of the decrease in expenditures, largely due to the increase to the age of eligibility, it is projected that administrative expenses will also decrease.

B. Results

For comparison purposes, Table 4 shows the financial status of the OAS Program as it is presented in the 10th OAS Program Actuarial Report. Tables 5 to 9 show the financial statuses and impacts of implementing an increase in the age of eligibility and voluntary OAS pension deferrals as given in Part 4 of Bill C-38. The financial status of the Program after implementing an increase in the age of eligibility and its impact relative to the financial status before any amendments are shown in Tables 5 and 6, respectively. Next, the financial status of the amended Program including voluntary pension deferrals and the impact relative to no deferrals (increasing the eligible age only) are shown in Tables 7 and 8, respectively. Lastly, Table 9 presents the total impact of both amendments on the financial status of the Program.

As shown in Table 6, increasing the age of eligibility only without any voluntary pension deferrals results in expenditures reducing by $474 million in 2023 (the first year of the transition) and by $10.9 billion in 2030 (after the transition has completed), relative to the projections under the 10th OAS Program Actuarial Report.

Table 8 shows the impact of voluntary pension deferrals over and above increasing the age of eligibility. Initially, expenditures decrease by $32 million in 2013 and then further decrease until 2016 (by $210 million). Thereafter, the higher benefits received due to deferrals start to offset the reduction in expenditures from delaying pension take-up. As a result, the reduction in expenditures becomes less, with the change in expenditures eventually becoming positive by 2024.

Table 8 shows how voluntary deferrals affect the Program's projected expenditures. The actual expenditures will depend on the exact ages at which beneficiaries choose to start receiving their pensions. The actuarial adjustment factor of 0.6% per month was derived such that the lifetime benefits received by a cohort of individuals would be the same regardless of the age at which they all start their benefit. However, as individuals will opt for their benefits at different ages (i.e., all individuals in a cohort may not start their benefits all at the same age), actuarial neutrality for the Program in respect of voluntary deferrals will be achieved over a different period of time.

Considering both the increasing age of eligibility and voluntary pension deferral amendments together (as shown in Table 9), the projected total impact on the financial status of the Program is a decrease in expenditures of $32 million in 2013, thereafter further reducing to $526 million in 2023 and $10.8 billion by 2030 as compared to the projections of the 10th OAS Program Actuarial Report.

Table-4
Table 4 Financial Status before Amendments (Text Version)

Table-5
Table 5 Financial Status After Increasing the Age of Eligibility (Text Version)

Table-6
Table 6 Impact of Increasing the Age of Eligibility on Financial Status (Text Version)

Table-7
Table 7 Financial Status of Amended Plan (increasing age of eligibility and voluntary pension deferrals) (Text Version)

Table-8
Table 8 Impact of Voluntary Deferrals on Financial Status (relative to increasing age of eligibility) (Text Version)

Table-9
Table 9 Total Impact of Amendments on Financial Status (Text Version)

V. Uncertainty of Results

This actuarial report on the OAS Program is based on the projection of its expenditures over a long period of time. The information required by statute, which is presented in section IV Financial Status of this report, has been derived using best-estimate assumptions regarding future demographic and economic trends. Given the length of the projection period and the number of assumptions required, it is unlikely that actual future experience will develop precisely in accordance with the best-estimate assumptions that underlie the actuarial estimates.

Due to the uncertainty as to how many individuals will choose to defer their pensions and thereby receive higher benefits, one sensitivity test has been prepared assuming a different change in pension take-up rates for pension deferrals other than the best-estimate assumption. In comparison to the best-estimate assumption, the test shows the effect of a decrease of 15 percentage points as opposed to 5 percentage points in the take-up rate at the first eligible age.

Table 10 summarizes the number of beneficiaries in 2030 who will receive a higher pension due to voluntary deferrals and the total corresponding increase in expenditures under the best-estimate and sensitivity test scenarios. Under the best-estimate scenario, there would be about 550,000 beneficiaries in pay receiving higher pensions due to having deferred their pensions beyond their first age of eligibility. For these beneficiaries, the total projected increase in benefit expenditures in 2030 would be about $475 million, resulting from the maximum of an actuarial adjustment applied and additional years of residency accrued (for those with less than 40 years). These figures differ from those shown in Table 8, since Table 8 reflects that there are fewer beneficiaries in any given year compared to the Program without deferrals. Under the sensitivity test with a greater shift in pension take-up rates, it is projected in 2030 that 1.1 million beneficiaries would receive higher pensions due to deferrals with a corresponding total increase in expenditures of $967 million.

Table 10 Sensitivity Test - Number of Beneficiaries Receiving a Higher Pension due to Voluntary Pension Deferrals
Assumptions Scenario Number of Beneficiaries Receiving a Higher Pension due to Pension Deferrals in 2030
(thousands)
Total Increase in Benefit Expenditures due to Pension Deferrals in 2030
($million)
Individuals not in receipt of the GIS choose to defer their OAS pension. Best-Estimate: 5 percentage point (pp) drop in take-up rates at first eligible age; subsequent increases of 2.5 pp, 1.5 pp, and 1 pp at next higher ages, respectively. 548 475
Individuals not in receipt of the GIS choose to defer their OAS pension to twice the extent than under the best-estimate scenario. Sensitivity Test: 15 pp drop in take-up rates at first eligible age; subsequent increases of 7.5 pp, 4.5 pp, and 3 pp at next higher ages, respectively. 1,144 967

VI. Conclusion

  • Prior to the increase to the age of eligibility, projected total Program expenditures are respectively $32 million and $102 million lower in 2013 and 2022 than under the 10th OAS Program Actuarial Report. During this period, it is assumed that 5 percent of individuals turning 65 will voluntarily defer receiving their OAS pension in exchange for an actuarially-adjusted higher pension. As such, this will result in initial net savings to the OAS Program, which will be offset in the future by higher costs associated with providing a higher pension to those who deferred.
  • Between 2023 and 2030, as a result of the gradual increase in the age of eligibility from 65 to 67 and the voluntary deferral, the projected total Program expenditures will be reduced by $526 million in 2023 and $10.8 billion in 2030 as compared to the 10th OAS Program Actuarial Report projections.
  • By 2030, the projected numbers of OAS and GIS beneficiaries are respectively lower by about 1 million and 230,000 compared to the 10th OAS Program Actuarial Report.
  • By 2030, it is projected that between 550,000 and 1.1 million beneficiaries will be receiving a higher OAS pension as a result of the voluntary deferral, with corresponding increases in their pensions of between $475 million and $967 million.

VII. Actuarial Opinion

In our opinion, considering that this 11th OAS Program Actuarial Report was prepared pursuant to the Public Pensions Reporting Act:

  • the data on which this report is based are sufficient and reliable;
  • the assumptions used are, individually and in aggregate, reasonable and appropriate; and,
  • the methodology employed is appropriate and consistent with sound actuarial principles.

This report has been prepared, and our opinions given, in accordance with accepted actuarial practice in Canada, in particular, the General Standards of Practice of the Canadian Institute of Actuaries.


michael millette

Michel Millette, F.S.A., F.C.I.A.
Senior Actuary

jean-claude

Jean-Claude Ménard, F.S.A., F.C.I.A.
Chief Actuary

Ottawa, Canada
18 July 2012

Appendix A – Detailed Tables

Table 11 Beneficiaries (Projected)
Year Number of Beneficiaries Recipient Rates
OAS
(thousands)
GIS
(thousands)
Allowance
(thousands)
OAS
(%)
GIS
(%)
Allowance
(%)
2013 5,269 1,886 86 97.9 35.1 4.1
2014 5,453 1,957 84 97.8 35.1 3.9
2015 5,646 2,028 82 97.8 35.1 3.7
2016 5,847 2,106 81 97.9 35.3 3.5
2017 6,052 2,185 81 98.0 35.4 3.4
2018 6,271 2,264 80 98.1 35.4 3.3
2019 6,501 2,352 80 98.1 35.5 3.2
2020 6,743 2,431 79 98.2 35.4 3.1
2021 6,985 2,511 79 98.2 35.3 3.0
2022 7,236 2,595 78 98.3 35.3 3.0
2023 7,380 2,653 78 96.9 34.8 2.9
2024 7,485 2,705 78 95.2 34.4 2.9
2025 7,588 2,760 78 93.4 34.0 2.9
2026 7,671 2,795 76 91.5 33.3 2.9
2027 7,758 -2,844 75 89.8 32.9 2.9
2028 7,844 2,890 73 88.2 32.5 2.9
2029 8,028 2,950 71 87.8 32.2 2.9
2030 8,265 3,029 68 88.2 32.3 2.8
2031 8,494 3,104 64 88.9 32.5 2.7
2032 8,704 3,171 61 89.7 32.7 2.6
2033 8,874 3,225 59 90.2 32.8 2.5
2034 9,012 3,268 58 90.4 32.8 2.4
2035 9,134 3,299 56 90.5 32.7 2.4
2036 9,247 3,327 55 90.6 32.6 2.4
2037 9,355 3,352 54 90.8 32.5 2.3
2038 9,455 3,371 53 91.1 32.5 2.2
2039 9,534 3,383 52 91.2 32.4 2.1
2040 9,600 3,390 52 91.1 32.2 2.1
2045 9,878 3,388 52 90.7 31.1 1.9
2050 10,212 3,376 51 90.2 29.8 1.8

Table-12
Table 12 Expenditures and Average Annual Benefits (Projected) (Text Version)

Table-13
Table 13 Expenditures as a Percentage of GDP (Projected) (Text Version)

Appendix B – Acknowledgements

Service Canada provided statistics on the Old Age Security Program.

The co-operation and able assistance received from the above-mentioned data provider deserve to be acknowledged.

The following people assisted in the preparation of this report:

  1. Yu Cheng, A.S.A.
  2. Patrick Dontigny, A.S.A.
  3. Sari Harrel, F.S.A., F.C.I.A
  4. Lyse Lacourse
  5. Louis-Marie Pommainville, F.S.A., F.C.I.A.