New analysis from the Parliamentary Budget Officer concludes that federal government finances should be sound, even as the cost of old age security benefit programs escalate.
The PBO released its report Wednesday amid an emerging debate over the need to reform the retirement security system to put it on a more sustainable footing.
The report suggests that government finances appear to be sustainable under current assumptions.
With the baby boomers retiring in the years ahead, altering the mix of working and dependent populations, the PBO reports that its baseline projection of federal elderly benefits shows an increase in the cost of the program of one percentage point of GDP, from 2.2% ($36 billion) in 2010-2011 to a peak of 3.2% ($142 billion) in 2036-2037.
The PBO notes that this projection is somewhat higher than projected by the Office of the Chief Actuary as it includes some ‘enrichment’ to benefit payments over and above the statutory indexation to inflation. If benefit payments are only indexed to inflation, elderly benefits relative to GDP are projected to increase by 0.8 percentage points to a peak of 3.0% of GDP in 2031-2032.
Assuming that the federal tax burden remains at 15% of GDP (its projected level in 2015-16), which is almost two percentage points of GDP lower than the average over the last 50 years, elderly benefits are projected to increase from 15.9¢ per dollar of revenue in 2010-2011 to 19.8¢ in 2030-2031, but then decline steadily to 12.8¢ per dollar of revenue by 2080-2081, it says.
The PBO says that its updated long-term debt-to-GDP projections, “show that the federal fiscal structure is sustainable even under the baseline assumption that there is some additional enrichment to elderly benefit payments”. If benefits are indexed to inflation only, the rate of decline in the federal debt ratio would be faster, it notes.