Employee Financial Literacy Blog

A better way to reform Old Age Security (OAS)

Posted by Frank Wiginton on Tue, Mar 29, 2016

OAS_Reform.pngThe goal of recent changes and discussion around OAS reform has been to reduce the financial burden on the government and to help ensure the viability of OAS going forward. When the Conservative government led by Stephen Harper made changes in 2012 to increase the age of eligibility from 65 to 67 many experts said that this would have a short term impact on reducing the burden but long term the impact would be negligible.

To build true reform we need to look at the purpose of OAS and why it was created in the first place. Originally introduced in 1927, OAS was intended to provide a means-tested pension for senior men and women who had little to no-income.

"The purpose of OAS is to provide a pension for those seniors who have little to no-income."

Although OAS has been reformed many times over the years, its purpose still hasn’t changed, but has our society and other support structures? We now have a contributory pension (CPP) that didn’t come into existence until 1967 and the addition of Guaranteed Income Supplement (GIS) to add additional funds to support lower income seniors. Another monumental change in seniors’ income and ability to qualify for social benefits was the introduction of pension income splitting in 2007 which saw government OAS payouts increase by nearly 10%.

Using 2016 numbers, a couple could have a net combined taxable income of over $147,000 a year and still qualify for their full Old Age Security benefits. Does the benefit still match the purpose of OAS?

For years I have helped Canadian Retirees prepare financial plans and legally leverage the tax programs and structures to maximize their assets and minimize their taxes. I have routinely found ways to make it so that individuals and couples who have millions in assets can still qualify for their full Old Age Security benefit. Are these the people who the OAS was intend?

True reform would see the return of OAS to its intended purpose, to provide income to those seniors who have little to no-income. In a political arena this is highly unlikely as it would be VERY unpopular. Many now see the OAS as an entitlement and much the way Guaranteed Income Supplement was a temporary measure when it was introduced in 1967, it is now a permanent benefit.

We need to find a compromise between the political possibility and return to the intend purpose of the OAS.

I will begin this idea by saying I have not fully researched the implications of it, rather looked at many of the fundamentals surrounding it. I have considered the need to keep it simple so that it can be easily communicated without confusing the issue. I leave it to those of you with the knowledge and access to information to fill in the blanks and offer intelligent comment to further the discussion.

The new idea: Reduce the income threshold and the recover tax (claw back) rate to a level more representative of those with a low income. Currently the OAS income threshold is $73,757 (2016) and the OAS benefit is reduced by $0.15 for every dollar over that amount. This results in the full maximum benefit amount being clawed back once the income is greater than $119,398. The new OAS would see the income threshold start at $43,332 and only reduce benefits by $0.09 for every dollar over that amount, resulting in a full claw back at the same $119,398.

So if we look at a few examples of the impact this might have on those receiving benefits:

A couple with combined net income of $110,000 that can be split evenly and each qualify for the maximum OAS. Their net income would be $55,000 each. Today they would each qualify for $6,846 in OAS benefits and would have none of it clawed back. Under the new idea OAS they would still receive $5,796 in OAS benefits each as $1050 would be clawed back. (($55,000-$43,332)*0.09)

Will a $2100 reduction in benefits be detrimental to household with over $100,000 in combined income? Maybe, but is that the purpose of OAS?

Part two of the idea is to recognize the additional costs of living as a single. The change in the threshold for singles would begin at $54,900 with benefits reduced by $0.09 for every dollar on income over $54,900 and under $73,757 and a reduction of $0.11 between $73,757 and $120,720.

So a single senior with an income of $65,000 a year would have received $6,846 would now receive $5,937 as $909 would be clawed back. (($65,000-$54,900)*0.09)

Additional discussion and research should be done to see whether these social benefit income tests should be based upon net income (line 236) or taxable income (line 260). These changes may be more palatable if we changed the income threshold to be based upon taxable income (line 260) after all tax credits are factored in. (Maybe part 3?)

With this new idea, OAS begins to return to its original purpose while continuing to provide the benefit many believe they are entitled to.

I write this to encourage intelligent, thoughtful discussion of a pressing financial and political issue. Please share your thoughts and ideas and spread the discussion through sharing this post.

Tags: CPP, financial wellness, OAS, pension, financial well-being, politics