Reforming Old Age Security: A Good Start but Incomplete
In 2012, the federal government shocked many Canadians by announcing an important change in the cherished Old Age Security (OAS) program, one of three key income programs for seniors. The reform, which was implemented in the 2013 budget, increases the age of eligibility for OAS to 67 from 65 beginning in 2023 with full implementation achieved in 2029. While the reform is a positive first step given the aging of Canadians, more is needed.
What was not included or even discussed in the reforms was income eligibility for OAS. Currently, individual seniors are eligible for the full OAS benefit when their income is less than or equal to $70,954 (2013 tax year). Seniors earning between $70,954 and $114,640 receive partial OAS benefits while those earnings above $114,640 receive no benefits.
OAS benefits are calculated on an individual basis, which means that two seniors living together can have household income up to $141,908 (2013) and still qualify for full OAS benefits. Alternatively, senior couples can earn combined household income up to $229,280 and receive full to partial OAS benefits.
Unlike the Canada Pension Plan (CPP), there is no dedicated fund to pay for OAS. Benefits are financed with current tax revenues. This effectively means that workers, whose average wages and salaries in 2012 were $45,776, are financing benefits to seniors who in many cases have higher average income than the workers.
Indeed, according to projections for 2013, there are more than 950,000 seniors earning more than $50,000. Roughly 55 per cent of these seniors will receive the full OAS benefit under current guidelines while a third will receive partial benefits. At a time of profound demographic change coupled with deficits and mounting debt across the country, transferring income from working Canadians to middle and in some cases upper-income seniors makes little sense and wastes valuable resources.
This leads to the next needed reform in OAS: changing the income threshold for eligibility. A starting point would be to lower the income eligibility for full benefits to $51,100. This would integrate the eligibility of OAS benefits with those paid under the CPP.
Such a change would leave benefits for low and most middle-income seniors unchanged but seniors with income over $51,100 would only receive partial benefits and those with income over $94,787 would no longer receive benefits. This single reform is estimated to yield $730.4 million in savings in 2013 with an expectation of greater savings in the future as proportionately more Canadians become eligible for benefits.
The savings could be used in two critical ways. First, many observers have complained about the inadequacy of benefits for low-income seniors living alone (single) and those living in higher cost urban centres. A serious empirical evaluation of both assertions is needed but if proven true, the savings could be used to augment the benefits paid to such seniors.
Second, a portion of the savings could and should be used to improve the savings options available to working Canadians in the form of RRSPs, TFSAs, pensions, and general savings. In addition, there are tax biases in the treatment of investment earnings in RRSPs and pensions that could at least be partially corrected by the savings.
Another issue not included in the reform that should be considered is the reduction of the clawback rate for OAS benefits. Currently, seniors with earnings above $70,954 incur a 15 per cent clawback on their OAS benefits in addition to their normal income taxes.
For example, this results in effective marginal tax rates for seniors of between 47 per cent (Alberta) to 54.4 per cent (Manitoba) if they have an income of $75,000. In six of the 10 provinces, a senior who chooses to work at this particular income level will face a marginal tax rate in excess of 50 per cent.
Most Canadians would agree that such punitive marginal tax rates impose a barrier for seniors wishing to remain in the labour market. At a time when more and more businesses are complaining about labour shortages, it is counter-productive to impose such high tax rates on seniors.
While the federal government should be applauded for its willingness to tackle a sensitive and controversial issue, the changes made to OAS to-date are a first step in what needs to be a larger reform process. Given the marked aging of Canada coupled with the ongoing deficits across the country, government spending must be re-focused and prioritized. Transferring income from working Canadians to middle and upper-income seniors is both unsound and unaffordable. Changing the income eligibility for OAS means a sounder program and savings that can be used for higher-end purposes such as ensuring adequate benefits for low-income seniors and more saving options for working Canadians.
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