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(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Economy Lab

Let's inject some creativity into retirement policies Add to ...

Tammy Schirle is an Associate Professor of Economics at Wilfrid Laurier University

The vague pension announcements keep us guessing. I expect this is good political strategy, but it causes a great deal of anxiety for many Canadians heading into retirement. Expecting increases in the OAS eligibility age, many are concerned about the Guaranteed Income Supplement (GIS) and what will happen to our poorest seniors. Perhaps it’s a good time to revisit how we help some of our most vulnerable residents.

The GIS rules are complex, and you would have to sift through the legislation and regulations to figure out how it actually works. Currently, a single individual can receive a maximum benefit of $732 per month when over age 65. Regular benefits are reduced by 50 cents for every dollar of income from some sources – including RRSPs, pensions, employment earnings over $3,500, and CPP. Benefits are not reduced for income from other sources – OAS, TFSAs or your first $3,500 in wages. Realized gains on investments count against GIS, while unrealized gains (such as those on housing assets) do not.

Making decisions even more complex, benefit eligibility and reductions depend on marital status and family income. Individuals age 60-64 are eligible for benefits if their spouse is over 65 or they are widowed. Single individuals age 60-64 are not eligible, nor are widows who get married to someone under 65.

On the plus side, the GIS and other public pension expansions have been credited with the dramatic reductions in elderly poverty since the 1970s. While more than 30 per cent of seniors had income less than Statistics Canada’s Low Income Cut-off in 1977, only 5 per cent were this poor in 2008 (see here for some details).

Can we find a way to improve on senior poverty, reduce the complexity of this system, minimize the distortion to savings and work decisions, and still save some tax dollars? Here’s some ideas that we could debate (and should probably be considered as a package):

1. Maintain a minimum GIS level to achieve the standard of living that Canadians expect for our seniors. Currently, a single senior over 65 with no other retirement income could receive up to $15,269 annually from OAS and GIS combined. Opinions will differ, but most Canadians would not consider that outrageous.

2. Separately define OAS and GIS eligibility ages

3. Allow GIS benefits to start at the same age for all individuals, regardless of their marital status, while maintaining family income as the basis for the income-test. To meet current standards, the age would be reduced to 60.

4. Have all income treated equally when determining benefit eligibility, including OAS. The inclusion of OAS only works if we raise GIS benefit maximums to achieve the current standard of living and separate OAS and GIS eligibility.

5. Create a progressive GIS clawback system, potentially improving the work and lifetime savings options for the poorest seniors who are able. For example, we could apply a 0 per cent clawback on the first $2,000 of income, 25 per cent on the next $2,000, 50 per cent on the next $2,000, and 75 per cent on any income above $6,000. I’m sure a better scheme could be derived, but this one would result in senior individuals having roughly $25,000 (including OAS) before being completely cut off from GIS.

6. Require an accounting of other assets and potential income sources when determining eligibility. For example, I think a GIS recipient at age 60 should be expected to initiate their CPP benefits early as well. Also, the fact that seniors who invested in houses don’t pay rent could also be considered.

Economists would love an opportunity to design a pilot program and properly evaluate the implications of such changes to our public pensions. The full budgetary implications would depend on the labour supply elasticities of seniors likely to pick up GIS benefits, but I suspect a scheme like this could actually save governments some money.

I don’t pretend to offer the optimal policy choice here, this requires much more serious thought. Rather, I simply suggest our policy makers try being a bit more creative than simply eliminating benefits for 65 year olds.

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