Budget 2016—A missed opportunity to reform senior benefits
Last week’s federal budget included a proposal to increase the top-up benefit for some of Canada’s most vulnerable seniors. This may well be a good move since the policy will provide assistance to seniors who actually need it, namely single seniors at higher risk of living in low income than their peers. However, the Liberals, who also propose to run a $29.4 billion deficit this coming year, missed an important opportunity to pay for the entirety of the increased transfer with a cost-saving reform to the Old Age Security (OAS) program.
Specifically, the budget proposes to increase the top-up benefit that a single senior can receive through the Guaranteed Income Supplement (GIS) by up to $947 annually, depending on the senior’s income.
The increased transfer targets single seniors, who are more likely in need of assistance in retirement than other seniors. Consider that in 2013, 10.7 per cent of single seniors had incomes below Statistics Canada’s low income cut-off, compared to 3.7 per cent of the general senior population.
The federal government estimates that the increase to GIS benefits will cost more than $670 million per year, putting additional financial strain on the programs related to OAS (including GIS). Critically, there’s no dedicated fund to pay for OAS since the benefits are financed with current taxes.
For 2016/17, the government plans to spend $48.4 billion on OAS and related programs, representing one sixth of every total program spending dollar. Spending on elderly benefits is projected to grow to $60.1 billion by 2020/21.
The longer term cost of the program is even larger. According to our latest calculations, OAS and related programs had an unfunded liability of $563.8 billion, assuming the age of eligibility remains 65 (instead of 67), as the government also proposed in the budget.
Rather than add to the growing cost of OAS, the government could have paid for the increased transfers to low-income single seniors by better targeting OAS benefits.
Currently, OAS provides a flat-rate benefit to eligible seniors, which maxes out for those with an income of $72,809 (2015 income tax year). Seniors with incomes between $72,809 and $118,055 receive partial benefits, which are reduced by 15 cents for each additional dollar of income above $72,809.
Because benefits are calculated on an individual basis, two seniors living together could have a household income of $145,618 and still qualify for full OAS benefits. Alternatively, senior couples could have a combined income of up to $236,110 and still receive partial OAS benefits.
In other words, a senior household with income well over six figures could receive full or partial benefits. Reforming OAS so that seniors with high incomes receive fewer benefits could produce cost-savings to pay for increased benefits to vulnerable seniors who need it.
For example, the federal government could lower the income eligibility for full benefits to $53,600, integrating OAS benefits with the maximum pensionable income under the Canada Pension Plan. Doing so would save approximately $1 billion, well above the $670 million that the government anticipates spending on increased transfers to low-income single seniors.
Focusing assistance on low-income single seniors may be the right approach to improving the gaps in Canada’s retirement income system, given that the policy directly targets the actual group in need. However, increasing GIS without other cost-saving reforms adds to the price tag of a system that will encounter increased fiscal pressure as the population ages.
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