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Time to overhaul Old Age Security – OAS 101

I read a Family Finance article recently in the Financial Post that caught my eye.  The article profiled “Philip”, a 78-year-old widower who lives well, who wants to avoid Old Age Security (OAS) clawbacks and leave some of his $1 million estate to his sons.  Sounds like a great plan and like Philip’s health status, his income is to be admired, a healthy $79,450.  While I’m happy for Philip’s well-being in his 70s, this article was a good reminder for me about the absurdity of our OAS program.

First up though, an Old Age Security primer as part of Financial Literacy Month #FLM2013:

Old Age Security 101

  • A sum of money designed to provide a minimum quality of life for older Canadians.
  • Canada’s largest pension program.
  • A monthly payment available to most Canadians aged 65+ who meet legal status and residence requirements.
  • You must apply to the program to receive the money.
  • OAS is unrelated to employment history (in contrast to the Canada Pension Plan (CPP)).
  • OAS is funded by tax revenues.
  • OAS payments are indexed to inflation using the Consumer Price Index.
  • Maximum monthly payments are around $550.
  • Starting in April 2023, the age eligibility for Old Age Security (OAS) benefits will increase to age 67.

Another thing you should know about the OAS program, clawbacks occur if you make too much money.

Why OAS needs an overhaul

While the increased age limit (to age 67) will help keep our Old Age Security program sustainable, I believe it will be a challenge to keep the program afloat with millions of baby boomers in their 60s soon.  More importantly, I think what constitutes “security” in old age must change.  This year, if a seniors’ individual net income is over roughly $70,000, the OAS payment will be reduced.  OAS is fully clawed back if the income is over $114,793. Back to Philip, his $79,450 income puts him over the 2013 clawback threshold.   I have a hard time understanding how any senior making more money in retirement that most working Canadians needs any government security at all.  To put it another way, working-class Canadians are financing the benefits of upper-class seniors.

That brings me to this, maybe my controversial wish for OAS:  keep it afloat but overhaul this sacred cow so any individual senior making $70,000 or more is ineligible for this government program.  Fix this program to focus on aging Canadians who need income security because they cannot live reasonably without it.

What’s your take on the OAS program?  Do you think this program is messed up?  Why isn’t OAS reform a bigger issue for Canadian taxpayers?

Filed in: Financial Terms 101, Old Age Security

45 Responses to "Time to overhaul Old Age Security – OAS 101"

  1. Bet Crooks says:

    The counter argument is the 78 year old paid OAS for others through paying his taxes every year he worked. On top of that, he worked and saved hard enough that he has assets and income in retirement.

    Why shouldn’t he get OAS?

    Why should the other 78 year olds who didn’t even necessarily work and didn’t necessarily pay anyones OAS through paying their taxes every year and who didn’t work hard and who didn’t save anything, get OAS?

    Most people do not consider OAS to have the same role as GIS. GIS is the one that ensures a minimum annual income for seniors.

    OAS was an attempt at a universal Canadian pension. OAS began in 1952. It was aimed at people like one of my relatives. He worked hard his whole life as an independent carpenter. He had no pension to retire because he didn’t work for a company. He paid his income taxes all of his life. The only money he had in retirement was OAS and his personal savings after raising 6 kids. There were thousands of people just like him: farmers, fishers, small tradesmen.

    CPP is a fairly new invention.It began in 1965. So if you retired in 1966 you had contributed for one year. You can imagine how small that pension was!

    There is probably a need to reform OAS but I’m not sure the answer is to decide to penalize those who worked hard and saved and to prop up those who barely worked and who didn’t save a thing.

    It probably should start by revising GIS. Living off $15,000 a year with no assets and no home is not easy or comfortable. Then they could start scaling back OAS.

    For sure though any government that cuts OAS will lose a lot of votes. Most young Canadians don’t vote and all of the federal parties know that. It’s seniors who still vote in large numbers and they will resent like *&*^*^ having OAS cut after they paid their taxes all of their working years so that the ones before them could get OAS.

    Just sayin’

    • I was hoping you’d write!

      Yes, I hear the counter argument, I just can’t get past any senior making $70, $90 or even $110k and still making money off general tax revenues.

      OAS is paid from those revenues, it’s not a contributory plan like CPP. Apples and oranges.

      I’m all for GIS actually.

      Having no pension, yes, I can see that being an issue in the “old days” but those “old days” are just that, old. The government in my opinion should not be in the business of subsidizing everyone’s personal savings. That’s a full-on welfare state and we’ll all be taxed to death. How many programs do we need for “income security”? OAS, GIS, CPP? Let’s have one, fund it accordingly and then keep the contributory plan (CPP) and redesign it also, accordingly.

      OAS is clawed back for high-income Canadians. I’m just saying high-income Canadians shouldn’t get any additional income. Give it to those who really need it.

      Thoughts?

  2. Matt says:

    In regards to OAS I can agree that it may have to be reformed futher.
    Where I disagree is in the manner that you suggest that it should be.
    If you think about it, what you are advocating is that the seniors who paid the most taxes should get the least out of it. Ie: make it yet another penalizing tax on people who work hard and try to do better for their families. Honestly, if we want more irresponsibility and poverty what should the government do? Why subsidize it of course! Study after study confirms it, raise welfare, what do you get? More welfare, not less. Anyways, I realize this is a bit of a rant but we honestly have to stop thinking this way as a society.

    We should not be penalizing success – we should be celebrating it. My neighbour doing well is not at my expense – in fact, my neighbour doing well is good for the economy and hence, good for me too.
    So, with this philosophy in mind, I propose that OAS be a flat amount – the same for everybody and not subject to claw backs. We raised the age of eligibility to 67 perhaps they could work on the actuary tables and lower the inflation calculation they use – that would likely save much more money over the long term than penalizing success would anyways.

    • Hey Matt,

      Thanks for writing.

      What I’m suggesting is seniors who make good money should not be subsidized more money.

      I agree: raise welfare, what do you get…more welfare. That’s not an incentive. What do you think would be a good incentive to save? No OAS or lots of OAS?

      I’m not out to penalize anyone, what I am suggesting is we use our tax dollars wisely, and with that middle- low-income Canadians should not be subsidizing the income of seniors making $100,000. That is wrong.

      Let’s continue the discussion….again, I appreciate the comments.
      Mark

      • kate says:

        I have been watching thsi growing drum beat to reduce OAS and so I have decided to scale back my savings for retirement. I am right on the edge of the clawback and so it makes sense for me to reduce my savings so that I get OAS.

        Thanks for giving me more money to spend today and not save for tomorrow. Oh, and thanks for reducing the amount that I will work and so that reduces the taxes that I pay.

        • Paul N says:

          Or…
          If your in that good a financial position, you probably can figure out (maybe with a financial advisers help) a way to create some “tax magic” that make you eligible. But the point I think of this post is not pay those who don’t really need it and not really back off just because you reach your limit.

          I agree with some of the wording with the other posters. A person could have paid more taxes in other ways throughout their lifetime. Who should really make that decision who deserves the subject of who deserves what, when they have 2 or 3 million or more stashed away (and did so maybe without a lot of hard work) then it is for others who may not.

          It’s a touchy subject

          • No doubt the wealthy utilize “tax magic” where they can.

            The subject of who deserves what is not an easy one to address, but while I’m all for a social safety net and support that 110%, I’m not in support of subsidizing wealthy seniors.

  3. Liquid says:

    I think still receiving OAS benefits when a senior is already making over $100K isn’t really necessary. I would like to see a reform where OAS is lowered for the high income earners, or maybe even combined together with GIS to make the paperwork easier for when people file income taxes each year. I don’t think there’s the political will to change it though. It’s true that the baby boomers will be the richest generation of retirees in Canadian history so far, but no politician would want to jeopardize their senior votes.

    • I hear ya….reform is definitely needed for high-income earners. Why do we need two different programs anyhow? GIS and OAS?

      Sadly, political suicide for sure.

      Thanks for the comment.

  4. I can’t imagine why any senior would need government assistance if they make over even $90,000. We pay into CPP, but not OAS – not directly (it’s funded from taxes). I think the system definitely needs a bit of an overhaul, but it’s hard to imagine how they would overhaul it.

    • I think the overhaul has to be slow, and needs to be done designed to help lower-income Canadians that need it the most. That should win some votes but not from any Conservatives I’m guessing.

  5. Matt says:

    The reason for being of the GIS and OAS is for Canadian seniors to have a decent retirement.
    It should remain that way in my opinion. Taking it away from those who managed to save only incentivizes more people not to save and incentives matter.
    The incentives in the modern welfare state are out of whack. The progressive tax system (a misnomer if I ever heard one) effectively penalizes you for doing better for yourself. It acts as a disincentive for overtime for example – How many studies do we need to tell us that we are losing our productivity? Yet, no one looks at escalating tax rates as a disincentive to produce more goods? It is a giant one in my opinion. I think we should have a flat tax, a minimum threshold of safety net for those that can’t help themselves and that’s it.
    If we start worrying about those that won’t help themselves than that leaves us with less opportunity for those that can’t help themselves which is who the social safety net is really for.

    /rant

    • Hey Matt, we agree: “The reason for being of the GIS and OAS is for Canadian seniors to have a decent retirement.”

      Making $70,000 today in retirement is more than decent….no?

      With a paid off home, that’s a good bundle of cash. That’s $4,000+ per month net. After some property taxes and some heating bills, you’ve got a good $3,000 to eat and have fun with. If you’re a senior and can’t live on that, you’ve got a spending problem not an income problem.

      Thoughts?

      Tax rates are an entirely different issue. With OAS, we’re talking about treasury and where we spend our dollars. How we get those dollars, is a whole set of other posts. Got some ideas for me?

      Mark

      • Matt says:

        I’m saying that responsible seniors shouldn’t be penalized for being responsible. Keeping OAS for middle and low income Canadians and taking it away from “high income” seniors is just that. You seem to think OAS is a special case because it is funded from current revenue but that it a separate issue from what we are talking about here. If people know they will be penalized if they save “too much” for retirement you have less money being saved for retirement which is the exact opposite of what we want.

        If you want OAS to be a pure welfare system then middle class should get it either. But putting a dividing line between middle and high income is arbitrary and unhelpful.

        Also, you do realize that you will likely be a part of the “high income” senior. So you are effectively asking to be penalized for all the planning and saving for retirement that you are doing now

        • Thanks for writing back Matt. Again, this is part of the dialogue I wanted to create with this post.

          People should not be penalized if they save too much. If anything, there should be incentives. Maybe a tax credit is provided. What would you think of that?

          Hypothetically, what if there was no OAS. Just GIS or a similar program that would provide a basic ‘salary’ to all seniors. That’s it. Once the money is gone, it’s gone. No clawbacks, nothing. Would there be an incentive to save or not?

          Personally, if I knew no money is there for me, I would save.

          I do realize I could be part of the “high income” senior bracket but I’m also not counting on OAS in retirement. Secondly, I’m very thankful for what I have and I think because of it, there should be more equality and helping those that are less fortunate.

          Again, appreciate your comments and views.

          • Matt says:

            People who are truly less fortunate you can help via thousands of different charities dying to get money to help. Personally I give to a charity that helps mentally handicapped people lead independent lives.

            What you seem to be saying is really a minimum wage. I have been doing some research on it and from what I have read I could support such a policy provided it was implemented smartly. A national minimum salary that all adults would receive and a flat tax on all income earned over and above. (Obviously taxed at 100% for the amount that equals the minimum salary) This of course would replace all welfare, EI GIS etc. I think such a framework could both help those who can’t (and even those who won’t) but at the same time it wouldn’t produce most of the undesirable disincentives present in our system today. As an added bonus it would be much more efficient to run that the patchwork of inefficient and ineffective programs we have today.

            So yes, there is definite room for common ground.
            We really need comprehensive tax reform.

          • You sound like you’re a generous soul…great on you for sure…and we need more people like you Matt.

            I definitely think there is some common ground to be had. We do need comprehensive tax reform. :)

  6. Paul N says:

    I agree with Bet + Matt’s points.

    I also have a problem with sacrificing things in my life at a younger age so I can enjoy a retirement later, while someone else knowingly does not and takes OAS. It’s different for those that did work hard or have a legit disability. I should be able to get that little extra bonus in those few last years of life.

    Some of you may remember a certain MP that tried to get the OAS for a certain population demographic in her riding in Ontario a few years back that luckily failed. Making the requirement just being a citizen for 10 years. So someone immigrating from another country can sit around for 10 years in a relatives home then collect OAS. I don’t think so! This is exactly what I mean about people receiving entitlements that didn’t contribute to it nor deserve it.

    Make the system so only those that deserve to get it – get it. But that’s a subject politicians won’t touch!

    • Hey Paul,

      I appreciate the comments. I can see the “contributory” argument for sure but this issue is more than a tax issue. It’s a spending issue. I would argue there are better things to do with our tax dollars than spend the funds on wealthy seniors. Helping lower income Canadians, I don’t take issue with and think that is actually where the focus should be.

      “Make the system so only those that deserve to get it – get it.” In my book, this is lower income Canadians.

      No politician will touch this issue in the short-term but it’s an issue that needs to be addressed.

  7. Avrex Money says:

    I agree with you Mark. Here are my thoughts.

    During our working life, those that make more income, are taxed at a higher tax rate.
    The idea is to shift the burden of taxation, a little more towards those that can afford it. Yes, our society has a socialism bias. I have no problem with that.

    Once we are in our retirement, why should the rules suddenly change?
    Why should those with higher incomes have to pay less (or in the case of retirement, receive more). Those with means, should get less from the government in retirement.

    Someone might as well argue that we should have a “flat tax” during our working lives. (Oh I just read the comments above, someone actually did suggest a flat tax. :) )

    A single retired person that has income >$70,000 does not need any more money.
    If a retired married couple can easily live on $50,000 jointly, then that rich individual will be fine with the OAS clawback. He doesn’t need the bonus money.
    In fact, I would say individual clawbacks should ‘start’ at $50,000.

    Q. Do you know how I’m going to avoid the OAS clawback when I get older?
    A. Retire early. ;)
    That way, I’ll burn through enough of my nest egg, such that, by the age of 67, I’ll never be near that clawback limit.

    • Finally, someone who agrees with me :)

      I’m all for a flat tax, simplify the tax code amongst other benefits.

      Nobody making >$70,000 needs “income security” in retirement. That is nuts. I’m all for no OAS after individual incomes of $50,000.

      I like your answer my friend :)
      Mark

  8. Paul N says:

    http://www.freerepublic.com/focus/f-chat/2176589/posts

    Sorry I disagree. The above old story comes to mind when I read these last posts.

  9. Sandi says:

    Hold on. Let’s agree on some terms: what is the Old Age Security pension (and benefits like the Guaranteed Income Supplement and the Allowance) for? It’s to guarantee a minimum income to seniors who – for any number of possible reasons – weren’t able to (or chose not to) save enough money in retirement. It’s not a “I live in Canada, and therefore – no matter how much other income I’ve amassed through dint of hard work or good luck – I deserve the same amount as everyone else” guarantee.

    It’s a government program, which means that as much as we may want it to be, it CAN’T be administered on a one-on-one basis. That means that rules have to be set that govern every circumstance. It’s not awarded on the basis of “did you spend profligately in your working years?” or “did you waste your money on things that we disapprove of?” because the cost to to review the thrift of every applicant would be prohibitive.

    That means that some people who “don’t deserve it” based on MY standards of general lifetime thrift are going to get it, so that a whole raft of people who were ill their whole lives, or who chose to work in low-income paying jobs of ministry in order to serve others, or who experienced year after year of failure or bad luck also get it.

    If there’s not enough money to go around, doesn’t it make sense that those who need it less get less?

    • Hey Sandi,

      Thanks for the detailed comment. I wasn’t implying OAS should be killed off entirely but the funds need to be better distributed as long as the program designed the way it is, exists.

      “Income security” for seniors is a great thing, and I’m all for it, but only to those that need it. Minimum income security for seniors making >$100k per year makes no sense to me. The clawback or threshold for that matter, needs to be much less.

      My post was controversial for a reason. I wanted to hear from folks passionate about the issue, to increase the dialogue.

      Your point about not having enough money to go around, is exactly the state of our new financial reality. This implies to me, OAS needs to be totally cut off for any senior making over $70,000 per year. This means that those that don’t need it, don’t get any, and those that do need it, it’s there for them.

      Thoughts?

      Mark

      • Paul N says:

        Could the well off senior in that case not get some kind of equalizing tax break rather then an OAS payment to make this feel better? I mean some well off seniors ammased their wealth on low incomes all their lives paying into our system. Their needs to be a benefit to that.

        As for a flat tax or consumption tax (earlier post) people will start trading goods and services to get around such taxes. I fix your car, you replace my windows in my house sort of thing. Do you really think the government wants to simplify taxes? It’s deliberately complex to extract more money that can be then burned by them down the road.

        • This is exactly what I’d like to see Paul, the well-off senior getting a tax break for not receiving OAS.

          This way, there is an incentive to saving and investing on your own and not waiting for government handouts.

          We need more incentives to reward those that can take care of themselves. As noted behaviouralist and change management guru Ken Blanchard puts it: catch people doing it right. :)

          Mark

      • Sandi says:

        You’re reading opposition where none exists. My fault for trying to write clearly before I’ve had enough coffee. I agree (almost) completely with your proposal, except on the point of stopping it completely at 70 – I waffle between agreeing to that or thinking that a (compressed) phased-in decrease in benefits is better.

        My disagreement is with most of the commenters who seem to have a “I worked hard, therefore I’m entitled to every benefit that every other Canadian is entitled to, whether those benefits are means-tested or not” attitude.

        • Ah, gotcha Sandi… my fault for jumping to conclusions!

          Yeah, I don’t get the entitled comments. Nobody is entitled to anything in life. That’s just selfish but that’s just me.

          Thanks for writing back!
          Mark

    • Matt says:

      That is your interpretation of what it is. You are saying that you want to penalize people who were responsible. GIS is there for the irresponsible already. I feel OAS should be for everybody or nobody as cutting it off at some arbitrary number you think is fair simply encourages people not to save and make more people dependant on the government.

      • Ok, what about a tax credit for folks that save vs. those that don’t?

        You might already be aware, OAS is cut off for some.

        • kate says:

          A tax credit is just waffling. if you think the higher income seniors don’t warrant OAS then stick to that principle. Otherwise it is just money from a different pocket. What sense does that make? A tax credit just adds to the complexity of the tax laws.

  10. JT says:

    Realize I’m a few days late but wanted to add a personal anecdote. A family member works full time and collects an employer pension. The employers pension is split income with his wife reducing reported income and both receive the full OAS. This is not an uncommon scenario as there is no longer mandatory retirement and the splitting pension income means many seniors no longer have the OAS clawback.

    Seniors vote so unless canada is ever in a Greece type situation this will not change and it is highly likely Cpp will be expanded increasing employer and employee taxes.

    • You’re never late to comment JT, thanks for stopping by.

      You’re right, although I’m not a fan of the OAS program, I suppose it will likely not change unless it becomes a political platform.

      I will need to do some deep thinking about what the OAS reforms could be, and make a blogpost on that. No point in complaining if there are no solutions coming to the table.

  11. I don’t know what to think about this issue really. In general, I hate it when government programs change drastically because people who were counting on them as part of their financial plan have to scramble to adjust to the moving target. I know if OAS was taken away from me, I would be upset even if I am “wealthy enough” in retirement that I don’t need it according to your standards or somebody else’s standards.

    That said, I would be in favour of eliminating OAS and greatly simplifying our tax system, as Matt said, in such a way that all income earners are treated similarly (one tax bracket) and there is a safety net for those that really need it. I think encouraging people to work hard, earn more money, and save for their future is the right thing to do.

    I’m definitely not an economist and I don’t understand every angle of dealing with the poor and disabled for sure, but I think there has to be a simpler and better way than what we have. I say simplify taxation, reduce the cost of maintaining all these programs, and then redirect some or all of those resources to ensure people don’t skirt the tax system and ensuring that the right people get the assistance they need. Also spend some of the extra money saved running expensive TV ads educating Canadians that they need to save money and prepare for their future – I think that would be money well spent. Probably easier said than done, but that is what I would like to see in an ideal world.

    • I’m definitely not an economist either, but I think something has to be done with OAS. It’s a mess.

      Maybe a flat tax is the way to go?

      There must be a social safety net for those that are less fortunate but I don’t think a retiree making $100k is less fortunate and should be given tax dollars to supplement their income.

      Thanks for the detailed comment Stephen!

  12. stephen says:

    All seniors get OAS, you no longer have to apply as one who doesn’t need it I would gladly forego the extra tax hassles it causes.

    Further I have one consideration no one appears to have mentioned, if your income is largely from dividends the gross up factor (38 percent) causes you to have a fictitiously high gross income. In my case something like $25,000 gross up puts me well into pay back territory yet if I only had to real $ I actually I have to spend I’m not even at the $70,000 pay back territory.

    I am one who saved all my life paid taxes on low income and now finally my justly worked for reward of decent retirement income has arrived.

    • I would say most seniors get OAS but it does get clawed back for high-income seniors. I’m all for some type of government assistance for seniors but not ones making over $100k in retirement.

      Let’s at least lower the threshold?

      If your income is from dividends, yes, the gross up is a bit fictitious…

      For people like you Stephen who have worked all your life on a low income, you absolutely deserve OAS below a certain threshold. But I’m concerned about people working all their life on a low income or still working on a low income, and subsidizing high-income seniors. I’m not sure that is right.

  13. SPBrunner says:

    I am in the position to get my OAS clawed back. I just consider myself lucky that I earn what I earn rather than feeling hard done by with the claw back.

    I agree that the rules should change. I would think at a cut off of $30,000 would be more appropriate than the current rules. I realize this is not popular with retirees. I know a lot of them that think the claw back is unfair. However, it is not a pension and should be reserved for those that really need it.

  1. […] Yes and no.  I would say no if investors are fortunate enough to have solid pension plan(s) in retirement and are getting modest Canada Pension Plan (CPP) or Old Age Security (OAS) payments. […]

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