Projections of OAS cost ratio indicate stability

The ratio of costs to GDP for old age security (OAS) is projected to be relatively stable, but uncertainty — particularly about inflation — weighs on the projections, says a recently released annual report.

The actuarial report on OAS as at Dec. 31, 2021, estimates the ratio of expenditures to GDP for the program will be 2.68% this year, and will hit a high of 3.0% by the early 2030s as baby boomers retire and costs steadily increase.

The report projected the cost ratio would then decrease to 2.64% by 2060, mainly due to expected slower growth in inflation compared to growth in GDP.

Projections assumed that the current level of inflation is temporary and the Bank of Canada will reach its inflation target of 2% by 2026.

However, the report noted the expenditures-to-GDP cost ratio for OAS is subject to volatility given various demographic and economic factors.

For example, it examined the downside risk of a potential stagflation scenario — economic stagnation and an increase in inflation. Using inflation and unemployment rates that were higher than under best-estimate assumptions, and real-wage growth that was lower, the cost ratio increased to 3.32% in 2060 from the projected 2.64%.

The downside risk of climate was also examined using GDP that varied based on different transition pathways. Under such scenarios, the report found that the cost ratio could vary between 2.96% and 3.22% in 2060, depending on the assumed pace and timing of each transition.

While the OAS cost ratio was projected to be stable overall through 2060, “there is much uncertainty” about the program’s projected costs, a report summary said.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.