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There’s an old joke about making life jackets out of concrete: However faithful you are to the design, it’s still going to drown you.

It’s not a great joke, but it is an excellent illustration of the problems of some seniors, caught up in the clawback provisions of the Guaranteed Income Supplement after receiving emergency pandemic benefits. Those benefits and the GIS were both designed to help Canadians, but design flaws in each are combining to sink some seniors.

The GIS program is targeted to the poorest pensioners: Individuals must have an annual income under $19,428 to qualify. (Old Age Security payments aren’t counted in calculating income.) They can then receive up to $948.82 a month.

Those benefits are reduced by 50 cents for each dollar of income, so that by the time a senior’s income brushes against the ceiling, they are getting just $10.32 in annual GIS payments. Employment or self-employment income is partly exempted: the first $5,000 earned is not subject to a clawback. But for other kinds of income - including Ottawa’s pandemic income support for individuals – the clawback starts right away.

That’s been a problem for seniors who received payments under the Canada Emergency Response Benefit, or its successor, the Canada Recovery Benefit. In 2020, such individuals could have received thousands in pandemic benefits. But as a result, their GIS benefits are being reduced this year under the clawback rules.

The federal NDP is pressing the Liberal government to suspend the clawback, arguing that the pandemic is an exceptional situation and that many seniors would not have realized that last year’s assistance would result in reduced GIS payments this year. In any case, New Democratic finance critic Daniel Blaikie says, seniors receiving the GIS are low income and should not be penalized.

So far, the government isn’t giving any indication it intends to accede to the NDP’s request.

But the incident does illustrate two design flaws, one in pandemic benefits and the other in GIS clawbacks.

One of the most obvious problems with the CERB, and later the CRB, was that the programs were much more generous than Employment Insurance in replacing income. Typically under EI, no more than 55 per cent of income was replaced. But the CERB paid a flat $2,000 a month, and required only that recipients had earned at least $5,000 in the prior 12 months. That meant that lower-earning workers could receive benefits greater than their lost earnings – and magnified the clawback pain for low-income seniors.

Then there are the clawback provisions of the GIS. There’s an odd logic embedded in those rules, which distinguish between earned income and other kinds of income. If that distinction did not exist, seniors receiving pandemic benefits would only have faced a clawback for payments in excess of their lost earnings.

Presumably, the favourable treatment of employment income is aimed at encouraging seniors to work. Otherwise, why exempt the first $5,000 earned? But that presupposes that pushing seniors hovering near the poverty line into the work force is a desirable goal.

In fact, the federal Liberals have moved in the opposite policy direction, cancelling the previous Conservative government’s plan to gradually raise the retirement age. And the government has trumpeted its increase to both the GIS and Old Age Security payments as proof of its commitment to easing the financial strains of seniors, particularly in the weeks preceding the summer election campaign.

Clawing back GIS payments from the poorest seniors in the wake of the pandemic is clearly out of step with that policy thrust. And whatever the rules dictate, does the government really want to penalize impoverished pensioners? That may not be the intent of the rules, but it’s the unwanted outcome of a flawed design choice – a concrete life jacket, if you will.

Taxing questions

Responding to a recent Tax and Spend on carbon pricing, one reader asked about the definition of household income used in the story, which referenced a Clean Prosperity study. The reader wanted to know whether the analysis used gross or net household income.

In this case, household income referred to pretax income. This definition of household income includes both market earnings, and any transfers from government. For this specific study, annual carbon rebates were excluded from household income.

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Equalization’s growing problem: The Fraser Institute has released a new study that provides fresh projections for one of the biggest quirks in the quirk-heavy federal equalization program: Even as fiscal disparities between the provinces narrow, the cost of the program is inexorably rising. Notionally, if all the provinces had the same fiscal capacity, there would be no need for equalization. But under the funding formula introduced by the Harper government a decade ago, and maintained by the Trudeau Liberals, the amount that Ottawa spends is tied to economic growth, not the actual fiscal gaps between the provinces.

In the current fiscal year, the formula means that Ottawa is spending $500-million more than needed to simply close fiscal disparities between the provinces. But by fiscal 2025-26, that extra cost could soar as high as $8.9-billion, economists and study authors Ben Eisen and Joel Emes estimate.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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