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Wealth

What if the Canadian Government Gave Everyone $45k at Birth

Swapping OAS and GIS for a lump sum at birth could be a win-win proposition for residents and government budgets.

Governments exist to provide public goods (like streetlights) and to socialize certain individual costs (like healthcare) for the overall benefit of its population. It can be argued, therefore, that in addition to free healthcare it might be in a society’s best interest to ensure a secure retirement for every citizen.

Many governments already do this to some extent. In Canada, for example, people who contributed to the Canada Pension Plan will benefit from a schedule of payments upon retirement. Those who haven’t contributed may receive alternative retirement funding, such as the Old Age Supplement and the Guaranteed Income Supplement.

None of these provide for a particularly flush retirement, however it keeps most of Canada’s retired residents housed and fed.

What if, instead of providing supplemental income at retirement, the government gave a lump sum to each person born in Canada? The lump sum would be untouchable until retirement, and would be invested on the baby’s behalf until he reaches age 65.

Assuming a nominal return of 7% and inflation rate of 2%, a $45,000 investment at birth would equate to $3.7 million in nominal terms and just over $1 million in real terms (after inflation) by age 65. All things equal, this should provide a comfortable retirement for every person born in Canada, eliminating the need for OAS and GIS. Moreover, employees would no longer need to contribute to CPP or individual retirement portfolios, freeing up more money for consumption, if desired. But for the sake of simplicity, let’s assume people continue to contribute to CPP.

Providing $45,000 to every resident at birth would likely lead to a number of unintended consequences – such as birth tourism – but let’s leave that to the side and examine whether the broad idea is even feasible. This is a high-level conceptual look, not a thorough scientific analysis, and is meant to spark ideas and generate discussion, not propose ultimate solutions.

According to Statistica, it is expected that about 375,000 babies will be born in Canada in 2020. Therefore, to provide $45,000 for every baby born would cost about $16.875 billion annually. A ton of money. Yes, but not in relative terms.

How could $16.875 billion in new spending ever not be a ton of money? According to Employment and Social Development Canada (ESDC) – a department within the Canadian federal government – planned spending on OAS and GIS in 2017-2018 was $51.155 billion. Far more than the cost of the lump sum at birth, with much worse end results. Using the 4% rule of thumb for sustainable withdrawals, a $1 million portfolio could sustainably generate $40,000 in annual income (in today’s dollars). In contrast, OAS and GIS currently provide maximum $7,368 and $10,992 in annual income.

That’s 54% less retirement income at 3 times the annual cost to the Canadian government. While this analysis doesn’t consider all the nuances and knock-on effects, the idea seems worthy of further discussion.

2017-2018 Planned spending figure

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