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Ottawa likely to hike Guaranteed Income Supplement Add to ...

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

The fate of the 40th Canadian Parliament will likely rest on the budget, scheduled for March 22nd. One policy possibility emerging from the pre-budget inter-party discussions is an increase to the Guaranteed Income Supplement (GIS). If indeed parliamentary dissolution pivots on this issue, it seems worthwhile to have a quick look at the GIS.

The GIS is a monthly pension paid to about 1.6 million Canadians age 65 and older; about one out of three in the elderly population.

Eligibility depends on income -- for every dollar of income, a 50 cent clawback is removed from the GIS payment. Monthly amounts are currently $665 for singles and $1,104 for couples. At income levels above $15,960 for singles and $21,120 for couples, no GIS is received since the clawback has pushed the payment down to zero. Overall expenditures by the federal government on the GIS are projected to be $8.228-billion for 2011-12. Because of an aging population, this amount is expected to grow more quickly than the economy over the next 20 years, rising from 0.52 to 0.62 per cent of GDP.

The GIS has been instrumental in reducing rates of poverty among the elderly in Canada. In some of my own research, I find the proportion of seniors living under the low-income cut-off has fallen from more than 40 per cent to less than 10 per cent between 1973 and 2003. The largest drops in low-income rates over this period directly correspond to expansions of the GIS. As I have noted in Economy Lab before, though, it is important to recall that poverty among the young is more prevalent than among seniors in today’s Canada.

On the other hand, the GIS is often criticized for distorting work and savings decisions. For the labour market, in work with Tammy Schirle I have found that the GIS provides large disincentives to work for older Canadians. The 2008 budget partially improved this situation by providing an exemption for up to $3,500 of earned income. For savings, anyone withdrawing money from an RRSP faces not only an income tax bill, but a reduction of GIS that makes the RRSP a very poor savings vehicle for these seniors. The Tax-Free Savings Account alleviates this problem somewhat, but does not eliminate it.

With this in mind, here is what I will be watching for on the GIS in the budget:

  • What is the total expenditure of the increase and what is the expected change in elderly poverty?
  • Does the structure of the increase make the savings and work incentives better or worse?

Author's note: As commenter lolwut kindly and correctly points out, not all sources of income are included in the GIS calculation. In particular, income from the Old Age Security, Allowance, and Guaranteed Income Supplement pensions is excluded, along with $3,500 of earnings. See here for more detail.

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