As you’ve probably heard, the federal budget of March 29, 2012, made a number of changes to Canada’s retirement income system. Are these changes good, bad, or indifferent? The debate rages on, but now that the budget dust has settled a bit, here’s my take on how these changes might affect you, and what the consequences might be for your retirement planning.
First, here’s a quick rundown of the key proposed changes to the retirement income system:
Eligibility age. The age of eligibility for OAS and GIS will be gradually increased to 67 from 65, starting in April 2023, with full implementation by January 2029. There’s an 11-year notification period, followed by a six-year phase-in period, to allow sufficient time for planning and adjustments.
This proposed legislative change to the age of OAS/GIS eligibility will not affect anyone who is 54 years of age or older (that is, those born on March 31, 1958, or earlier) as of March 31, 2012. Those who were born on or after February 1, 1962, will have an age of eligibility of 67.
Those who were born between April 1, 1958, and January 31, 1962, will have an age of eligibility between 65 and 67. Someone born in April 1960 (that is, one year and one month after the minimum eligibility age of March 31, 1958) will be eligible for OAS/GIS at age 66 and one month (that is, one year and one month later than the age 65 start date in place today).
In line with the increase in age of OAS/GIS eligibility, the ages at which the Allowance and the Allowance for the Survivor are provided will also gradually increase from 60-64 today to 62-66 starting in April 2023. This change will not affect anyone who is 49 years of age or older as of March 31, 2012.
Voluntary deferral. To improve flexibility and choice in the OAS program, starting on July 1, 2013, there will be a voluntary deferral of the OAS pension for up to five years, allowing Canadians the option of receiving a higher, actuarially-adjusted, annual pension amount. GIS benefits, which provide additional support to the lowest-income seniors, will not be eligible for actuarial adjustment.
Automatic enrolment. The budget proposes a proactive enrolment regime that will eliminate the need for many seniors to apply for OAS and GIS. This will be phased in from 2013 to 2015.
The bottom line
So what are the effects of these changes? Are they good or bad or is there really no impact at all? And should you be worried?
I think the government has failed to make any meaningful changes that will improve the long term financial viability of the Old Age Security system. It is difficult to understand how the proposed changes to OAS will improve the financial soundness of this program.
To put these changes into context, over the past 15 years, the Canada Pension Plan system has been changed significantly to ensure long-term financial viability: 1) Contributions have been increased; 2) benefits have been reduced (if you take CPP prior to age 65, the discounted amount you will receive will be much lower under the new rules than the old rules); and 3) benefits have been deferred (meaning that by forcing people to continue to contribute to age 65 via the Post-Retirement Benefit, most people will defer taking their CPP retirement income benefit to at least age 65). Yet, the proposed changes to Old Age Security come nowhere near these same benchmarks:
The 11-year notification period combined with a six-year phase-in period will do little or nothing to save money on this program. During this 17-year period, average life expectancy will likely increase by two additional years, meaning that the cost to the government will be identical to what it is today. By comparison, if nothing had been done, perhaps the government, and thus the taxpayer, would be on the hook for even more retirement benefits. But it would seem that this change will do very little to actually reduce the cost of the program.
Allowing an individual to defer drawing their Old Age Security for up to five additional years, and thus receive additional income benefits as a result, goes against the spirit of what this program was intended to provide in the first place. Old Age Security is funded from general revenues of the government and is not a funded pension plan such as the Canada Pension Plan. Therefore, for an individual to have the ability to defer the benefit and receive more total income seems to go against the government’s objective of controlling the costs of this program.
If the government were truly serious about managing future costs of this program, it could have been more aggressive by reducing the income level at which the Old Age Security clawback begins. In 2012, Old Age Security begins to be clawed back at $69,562 per spouse. This means that a retired couple could have a combined income of close to $140,000 before they could be considered as having a financially unsecure retirement and thus begin to lose some OAS benefits. Really? That seems a little high, especially when you speak about financial security in old age.
Keep in mind that both the clawback level ($69,562) and the Old Age Security benefit are both indexed each and every year. Reducing the starting level where OAS is clawed back is the only way in which the cost of this program can be controlled. Unfortunately, the government has chosen to raise the subject about changing Old Age Security benefits, but it has kicked the can further down the road and left the hard decisions for another time and another government.
What to do
So is this bad news? Not necessarily. For most Canadians, the new age of retirement will be 67. While this may seem daunting, the good news is that life expectancy as well as quality of life continues to rise. In the end, when compared with other generations, it is hard to see how those retiring 10 or more years from now will be much affected by these changes.
If you wish to make up this difference through self-funding, the good news is that the tools to make this happen in an efficient manner are already available: 1) Increase your RRSP contributions by $100 per month over the next 10 years; 2) reinvest your RRSP refund back into your RRSP; 3) reinvest your RRSP refund into a TFSA; and/ or 4) review your household budget expenditures and reduce your monthly expenses in retirement by a few hundred dollars.
In other words, by deferring OAS to begin at age 67, the only loss is the additional income you would have received under the old rules for two years. In today’s dollars, this would be the equivalent of approximately $400 to $800 per month of spendable, after-tax income, or a total of approximately $14,400. Considering that most Canadians will require additional savings in their pension plans and RRSP accounts of many hundreds of thousands of dollars, this small amount of money for a two-year period of time should be easily recoverable.
Doug Nelson, B.Comm., CFP, CLU, CIM, is a licensed financial planner and portfolio manager at Nelson Financial Consultants based in Winnipeg, Manitoba, and a regular contributor to the Fund Library. You can reach Doug at Nelson Financial Consultants, 102 – 147 Provencher Blvd., Winnipeg, MB, R2H 0G2. Phone: 204-956-0519; Fax: 204-942-6890; Email: firstname.lastname@example.org.
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please get in touch with the author to discuss your particular circumstances.