Business and Economy
Shooting a fly with an elephant gun: The Bloc’s ultimatum on seniors’ benefits
The bill was studied at committee back in February and several witnesses who spoke in favour of the bill framed it as a measure to reduce poverty among Canadian seniors. (Pexels Photo)
Thanks to a more precarious minority Parliament, the Bloc Québécois is flexing more policy muscle than it has in a while. It has laid out the conditions for its temporary willingness to support the minority Liberals, one of which would significantly increase key cash benefits paid to Canadian seniors.
The Bloc would like to see its draft bill C-319 become law, and it now has the symbolic support of other opposition parties (and a handful of current or recent Liberal MPs) thanks to an opposition-day motion that was passed by the House on Oct. 2.
The Bloc is proposing changes to both the quasi-universal old age security (OAS) program and the guaranteed income supplement (GIS), which tops up OAS for the lowest-income seniors. On the GIS, the Bloc wants the earnings exemption to increase from $5,000 to $6,500 so that lower-income seniors can make a bit more money through paid employment or self-employment before their GIS benefits are clawed back.
On OAS, the bill would increase benefits by 10 per cent for seniors aged 65 through 74 years of age. Benefits for seniors aged 75 have already risen by 10 per cent thanks to a policy change in the 2019 federal budget.
The bill was studied at committee back in February and several witnesses who spoke in favour of the bill framed it as a measure to reduce poverty among Canadian seniors. For example, the bill’s sponsor, Adréanne Larouche, member of Parliament for Shefford, argued:
“It’s also important to note that poverty among seniors is a worrisome reality. In 2020, 13 per cent of seniors were living in poverty, a rate higher than that of all other age groups. It’s our responsibility to ensure that seniors can live with dignity after dedicating their lives to the well-being of our society.”
But financial hardship among seniors has declined significantly thanks to Canada’s maturing system of retirement income, including OAS/GIS, as well as the Canada and Quebec Pension Plans (CPP/QPP), plus generous tax incentives for private and workplace savings. Compared to the 1970s, rates of low income for seniors have plummeted.
Starting in 2016, rates of low income, using the low-income measure after tax (the LIM-AT) have been higher among seniors than among youth and kids under 18 or adults under 65. The LIM takes the incomes of all Canadians, balances (or equivalizes) incomes for family size, calculates the median (the value where exactly half the population is above and below), and then divides the median in half. If you’re below that threshold, you’re in low income. This is a relative measure of poverty, so if other incomes rise (for example through wage gains or improved child benefits), then rates of low income amongst seniors can rise because they are compared to general incomes across all Canadians.
Canada’s official poverty measure instead uses the market basket measure (MBM), which was adopted after substantial study and consultation. This is an absolute measure of poverty that takes a basket of goods and services, sorts out the costs and determines the income needed to purchase the basket, with adjustments for location and family size.
Using this measure, rates of seniors’ poverty are consistently the lowest of any age group in the country.
Some argue that this poverty metric shouldn’t be used for seniors, that the basket doesn’t account for the out-of-pocket health-care costs they face. The real explanation for the low rate is that many more seniors own their home without a mortgage. This means that the role of housing expenses in the MBM basket has very different effects for seniors than other Canadians.
Taken together with the data on LIM (figure 1), it can be inferred that incomes for other groups have been rising faster than retirement incomes, but seniors are the least likely to go without the goods and services we deem essential to dignity in Canada.
Poverty reduction is also a strange justification to use for the proposed OAS boost given that 95 per cent of seniors receive the benefit. A 10-per-cent boost to benefits would go to all seniors under age 75, not just those seniors living in poverty.
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For seniors with lower incomes, the GIS is there as a top-up. It goes to just one-third of seniors, which is down from nearly half of all seniors in 1970. Again, as the retirement income system has matured, Canadian seniors today thankfully haven’t faced the deprivation their parents or grandparents experienced.
The OAS is taxable income, and the Parliamentary Budget Officer estimates that of the nearly $3.6 billion in additional OAS that would be paid out, up to 15 per cent would be returned to governments in the form of higher income taxes paid, leading to a still eye-popping cost to the bill of $16 billion over five years.
Some seniors’ advocates have argued that seniors in Canada pay substantial taxes so are helping to build the very same pool of government funding that higher OAS benefits would need to come from. But the reality is that many seniors pay very low, or no, income taxes at all.
In the table below, I have taken the 2019 income-tax return data for seniors (age 65+) in Canada, sorted seniors into income deciles (10 equal groups in order of personal income, from lowest to highest), and then worked out the median values of their total incomes before taxes, taxable income, predicted taxes at statutory rates (without deductions and credits), and the actual taxes paid after deductions and credits are claimed.
All dollar values are then adjusted to 2023, the most recent tax year. For the statutory rates, I use the provincial income tax rates in Ontario as well as the federal rates that apply across the country.
This table is striking in two respects.
First, at the median, the first five deciles (representing half of seniors) pay no or very low amounts of provincial and federal income tax.
Second, tax deductions and credits substantially decrease the effective tax rates of Canadian seniors, including the highest-income seniors. This is in part because some forms of tax relief (such as the disability tax credit or medical expenses tax credit) are more likely to be claimed by seniors. But there are also important forms of tax relief only available to seniors.
For example, the age credit is a non-refundable credit that reduces taxes owing for seniors by up to $1,259 for those aged 65 and older. Holding constant all other elements of the tax system, the federal Department of Finance estimates that the age credit removes roughly $5 billion per year in federal tax revenues. Pension income splitting removes another $2 billion per year and the pension income credit yet another $1.4 billion.
The exact amounts will depend on the myriad interactions between various tax measures, as well as behavioural response, but these figures give us a useful estimate of the order of magnitude of the fiscal costs of tax reduction for seniors.
The fiscal realities of redistribution in our tax and transfer system across age groups shouldn’t be ignored.
Important elements of our system were introduced at times when seniors were at far greater risk of poverty (figure 1) and represented a much smaller share of the population. OAS was launched in 1952, the age credit in 1972.
Figure 3 and 4 illustrate the shifting balance in the number of working-age adults available to work and pay taxes relative to the number of seniors drawing on seniors’ benefits for 1952, 1972, and as estimated in the current year and out to 2043 (the furthest year available).
Our population has aged significantly since then and will continue to be much older for decades to come. Already, OAS costs are expected to rise significantly in the coming years. In the most recent actuarial report on the program, Canada’s chief actuary is estimating that the annual cost of OAS will nearly double from $64 billion this year to $124 billion by 2040, even though average benefits paid to individuals will only rise with the projected rate of inflation.
The cost pressures are from the rising counts of people eligible to receive the benefit. A blanket increase for OAS benefits starting at age 65 would dramatically accelerate that fiscal pressure, particularly if there is no complementary adjustment to the preferential tax treatment afforded to Canadian seniors.
In the 2019 federal budget, the Government of Canada introduced a 10-per-cent increase to OAS benefits for older seniors aged 75 and older. That policy change was intended to deal with longevity risk. Some seniors do outlive some part of their sources of retirement income.
In fact, before the policy change, there was a small but visible uptick in poverty rates among seniors in their late 70s, an uptick that had disappeared by 2020. The cost of that policy change was estimated at $2.7 billion this year, rising to $6.8 billion per year by 2040.
Could longevity risk could have been effectively addressed at lower cost through an increase to the targeted GIS? It is a question that merits serious study. It is true that the government’s policy arguably gave social license to the argument that younger seniors should also share in the 10-per-cent benefit boost. But a comparison between younger and older seniors alone ignores the full demographic and fiscal picture.
The fact that Canadians live longer and are much less likely to age in poverty should be celebrated. These are enormous societal gains thanks in no small part to successful public policy.
But going forward, it is wise to question an expansion of benefits that reaches all seniors, who are no longer the minority age group in Canada and who no longer face steep rates of poverty. Big expansions of quasi-universal tools like OAS and the age credit are hard to justify particularly if the goal is to help the small share of seniors facing real poverty.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
