The Canadian government would have more money to allocate to working Canadians and low- and middle-income senior citizens by reducing the benefits working seniors with higher incomes are allowed to collect, a new Fraser Institute report suggests.
According Reforming Old Age Security: A Good Start but Incomplete, Ottawa could save $730 million annually by lowering the amount of OAS benefits a working senior could collect above a certain income.
Canadians who have reached retirement age (currently 65, but set to rise to 67 by 2029) can still collect OAS benefits if they continue working.
They can earn up to earn up to $70,954 annually before their OAS payments start getting clawed back. Seniors making $114,670 or more are not eligible to receive OAS benefits.
The Fraser Institute report suggests the cutoff for receiving full OAS should be reduced to $51,100, from $70,954, and that working seniors with incomes between $51,100 and $94,787 should be eligible to receive only partial payments.
According to the report, 950,000 senior citizens in Canada (17.5%) have incomes of $50,000 or more – slightly above the $45,776 the average Canadian worker earns.
The report also recommends decreasing a 15% clawback (the OAS recovery tax), which it says is a disincentive to seniors who wish to remain in the workforce. The tax is paid by seniors with incomes of $70,954 to $114,670.
Jason Clemens, executive vice-president of the Fraser Institute, told Business in Vancouver he would like to see the $730 million Ottawa would save annually used in two ways:
- increasing benefits for lower income seniors living in high-cost regions (Vancouver, for example); and
- helping working Canadians by eliminating the “tax bias” that is built into registered retirement savings plans.
“The argument is, reduce the spending in OAS and use the savings for both workers and current retirees,” Clemens said.
There are preferential tax rates for capital gains, dividends and interest on normal investment, Clemens said, but not for registered retirement savings plan (RRSP) income.
“People who save in RRSPs or pensions lose all that preferential tax treatment when they take their income out of their RRSP at the end because it’s all treated as normal income, and that is a problem,” Clemens said.
David Macdonald, an economist with the Centre for Policy Alternatives, said some of the changes being recommended by the Fraser Institute might be acceptable, if it truly meant more money going into the Guaranteed Income Supplement for low-income seniors.
“It’s something we should be doing irrespective of what’s happening on the OAS,” he said.
But he suspects what the Fraser Institute is recommending would mostly benefit higher income Canadians who can truly afford to take advantage of RRSPs.
“People at the higher end may well benefit from this,” Macdonald said. “RRSPs have been a really dramatic failure in terms of encouraging Canadians to save for their retirements, except for high-income Canadians. They’re the ones who max out their RRSPs every year.”
