Seniors will hate this idea, but let's increase the clawback on Old Age Security benefits.
We can help sustain OAS for the long term that way, and we do it in a way that doesn't favour today's retirees over the people with decades to go until they leave the work force.
Concerned about the rising costs associated with an aging population, the federal government has been looking at ways to trim OAS benefits. The idea generating the most talk is to set a future date at which the minimum OAS age would start climbing to 67 from 65.
That's a nice solution for Ottawa because it won't provoke current retirees. Angry seniors can be a handful for a government, as Brian Mulroney found when, in 1985, he tried to stop fully indexing OAS benefits to inflation. A 63-year-old Quebec woman named Solange Denis gave the prime minister a talking-to in a confrontation that was caught on camera. In the end, the government backed down.
Increasing the reach of the OAS clawback would invite the anger of scores of financially comfortable seniors. Even Susan Eng, vice-president of advocacy at the senior's group CARP, acknowledges how sensitive seniors are about this issue. "They grouse about the clawback for sure."
OAS is designed to provide a small base amount of retirement savings – $540 per month at most – to all Canadians who meet certain residency requirements. The program is targeted at low- and middle-income seniors, which explains the clawback for people with higher incomes.
For 2012, the clawback starts taking effect when taxable income, including pensions, investments, rental income and business income, exceeds $69,562. The clawback is equivalent to 15 per cent of the excess amount. With income getting into six figures, OAS disappears.
No question, we're dealing with comparatively well off people when we consider the clawback. According to the latest Statistics Canada numbers, the average married elderly couple had a household income of just over $60,000. The clawback, just to remind you, doesn't even kick in until an individual makes close to $70,000.
Ms. Eng said opposition to the clawback has little to do with income level. "It's more the principle of the thing," she said. "It's a function of this being a piece of the social safety net that they paid for all their many years, and they should just be able to get at it without all these hoops."
How many seniors are making enough money to experience the clawback? "Many, many are not," Ms. Eng said. "They're nowhere close."
The government could either increase the percentage amount of OAS benefits that are clawed back by a modest amount, or it could apply the current clawback rate at a somewhat lower income level. Another option is to de-index the annual income level at which the clawback applies.
It's a messier approach than raising the minimum OAS age to 67, but it's also a fairer approach in a generational sense.
The key question here is why today's younger Canadians – the seniors of tomorrow – must settle for OAS at 67 so current seniors can get it at 65. OAS is not a pension, like the Canada Pension Plan, where you pay premiums in your working years that essentially buy you a certain level of income. OAS is paid on an as-we-go basis out of general government tax revenue, which means people in the work force pay a big part of the OAS benefits that retirees receive.
Frankly, retirement at 67 or even later makes good sense in that it reflects today's longer lifespans and low levels of retirement savings. But, again, there's a generational angle to be considered. Seniors would be staying on the job longer, and that could mean fewer opportunities for young workers.
None of this is likely to placate the seniors in the clawback zone, but they're at least financially comfortable. "For the average senior, $69,000 is pretty good when you talk about retirement income ideally being 60 per cent of what you used to make before you retired," said Cleo Hamel, H&R Block's senior tax analyst. "You can live pretty comfortably for that in most parts of the country."
By the way, Ms. Hamel's dad had his OAS benefits clawed back one year after selling a recent property. "He was not very happy," she said.
Looking ahead a few years, two big themes that will guide federal government spending are austerity and an aging population. Lots of us will be giving up something to help make the numbers work and there's no reason today's well-off seniors can't join us.
The OAS clawback
High-income earners above the age of 65 may get all or a portion of their OAS clawed back if their annual income exceeds certain levels.
For calendar 2012, the clawback begins once income reaches $69,562.
OAS is clawed back at a rate of 15 per cent on income above the threshold noted above.
Your total OAS received is indexed and calculated quarterly. Therefore, maximum to be received in 2012 is not yet known.
For 2011, maximum OAS received was $6,368.25 and OAS will be clawed back starting at $67,668 of income; therefore, OAS will be fully clawed back at an income level of $110,123.
Example: If a senior has income of $72,500 in 2012, the repayment amount will be $440.70 (15 per cent of the excess between $72,500 and $69,562).
Source: Adam Scherer, Soberman LLP chartered accountants
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