Old Age Security Canada: Ottawa Poised To Issue Firm Decision On Raising OAS Age In 2012 Federal Budget
OTTAWA - The federal government is poised to issue a firm policy direction on Old Age Security in the upcoming budget centred around raising the age when retirees can start to collect.
Several government sources now say the budget will lay out a path forward, rather than launch a national conversation or policy paper on proposed changes despite considerable discomfort within the Conservative caucus on OAS changes.
"We have to take action right now to make sure that there are OAS funds there for seniors, not just for today's seniors, but for the seniors of the future," Human Resources Minister Diane Finley said Wednesday during Question Period.
"If we don't take action now, there may not even be an OAS system for the future."
The leading option is to increase the age of eligibility from 67 from 65 — an option Prime Minister Stephen Harper has publicly confirmed is under consideration.
The plan is to phase in the changes slowly and begin the process in a few years. One leading possibility — as uttered vaguely by Finance Minister Jim Flaherty last week and then retracted — is to start phasing in the increase in age in 2020, and make the change over five years.
Under that scenario, anyone now aged 57 or older would not be affected.
The OAS changes will likely be packaged together with cuts to public service pension packages, sources said.
But another option touted repeatedly by many experts is to change the clawback provisions so that richer recipients have to start paying back the benefit at lower levels of income.
That option is on the backburner, at least for now, government sources say.
Bureaucrats from several departments have been working on reform options for months, but officials insist that final decisions have yet to be made.
Conservative MPs expressed vocal concerns about the move at this week's caucus meeting, but generally left the meeting thinking the big decisions were already made, sources said.
But OAS changes are so politically explosive and financially complex that even firm decisions on a general policy direction can still be subject to an infinite number of tweaks and variations after the fact.
University of Calgary economist Jack Mintz says an option he wrote about recently is making the rounds among MPs and officials. His idea would see new incentives included in the OAS system that would encourage, but not force, retirees to delay their collection of government benefits.
He would also de-index the threshold at which the clawback kicks in so that more and more people are gradually paying back bits of their OAS benefits over time. For now, the clawback begins once individuals make $67,000 a year.
But Mintz, like many of the other pension experts and economists contacted for this story, urged the government to set out the parameters of a debate about OAS without making any set-in-stone decisions quite yet.
"We need to have a better discussion of the issue," he said.
The discussion would look at the fiscal pressures of aging, and then look at the best way to alleviate the pressure, he said. Instead of simply targeting OAS, Mintz is suggesting a thorough review would look at all benefits, tax credits and incentives related to retirement.
Raising the OAS eligibility age to 67 would likely save the federal government between 10 per cent and 15 per cent of the program's cost every year, said independent pension expert Richard Shillington.
If the changes were enacted today, Ottawa would save between $3 billion and $4 billion. That would rise to more than $10 billion by 2030.
Shillington cautioned that the savings were a rough estimate, since the mix of people receiving OAS can change dramatically over time.
While the federal government has made it clear that changes to the OAS system will not affect today's retirees or people nearing retirement age, ministers have not yet explained how they will deal with the Guaranteed Income Supplement.
The GIS is a sister program to the OAS that is meant to top up OAS payments for low-income seniors. The two programs are tied tightly together in practice and in legislation.
If the age of eligibility for OAS rises, the age to receive GIS would also rise — even though the combination of OAS and GIS has been widely credited for almost eliminating poverty among seniors.
The government could attempt to resolve the poverty issue by decoupling GIS from OAS, or targeting subsets of vulnerable seniors with extra benefits, said pension expert Bob Baldwin, who has advised the Ontario government on retirement security.
Harper took Canadians and his own caucus by surprise last month when he used a speech in Davos, Switzerland, to announce an overhaul of retirement benefits.
He did not explain his intentions or take any questions on the matter. Rather, he said "major transformations" were necessary to make sure OAS did not bankrupt the retirement system.
"Our demographics also constitute a threat to the social programs and services that Canadians cherish," he said.
But an analysis done by Parliamentary Budget Officer Kevin Page shows that OAS is sustainable if Ottawa wants it to be. Now that the federal government has scaled back long-term increases in health care transfers, it has the fiscal room to continue with OAS if it so chooses, Page has concluded.
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OAS vs CPP
Here is a look at OAS and the CPP and how they differ. (Getty) <em>With files from CBC</em>
What is OAS?
The Old Age Security pension is a monthly payment available to Canadians aged 65 and older who apply and meet certain requirements. Unlike CPP, it is not dependent on a person's employment history and a person does not need to be retired from a job to qualify. The government adjusts the OAS payment every three months to account for increases in the cost of living according to the Consumer Price Index. The average monthly amount was $508.35 in the last quarter of 2011. The maximum payout for the first quarter of 2012 is $540.12. There are also supplementary programs, including the Guaranteed Income Supplement, which provide additional income to low-income seniors. The government claws back OAS payments from high-income Canadians. In 2011, for example, if you were retired but had an income of more than $67,668 (from things like pensions and personal investments), the government would reclaim part of your OAS payment - 15 cents for every dollar of income that you had above the $67,668 threshold. That means that if you were retired with an annual income of around $110,000 or more in 2011, your OAS payout would be reduced to zero. (alamy)
Who Is Eligible?
OAS is available to Canadian citizens and legal residents living in the country who have spent at least 10 years in Canada after they turned 18. It is also open to people outside of the country who were Canadian citizens or legal residents on the day they left the country, as long as they spent at least 20 years of their adult life in Canada. (Getty)
When Should You Apply?
A person should apply for OAS six months before they turn 65. If you have not lived in Canada continuously or were not born in Canada, the government requires a statement containing all the dates when you entered and left the country. It may also ask for supporting documentation. If a person applies after age 65, they can receive up to 11 months in retroactive payments along with a payout for the month in which a person applies to receive OAS. So if a person applied after their 66th birthday, they would receive 12 months of OAS payments. (<a href="http://www.flickr.com/photos/elwillo/" target="_hplink">Flickr:Keith Williamson</a>)
How Is The Rate Calculated?
In order to qualify for a full pension, a person must have lived in Canada for at least 40 years after turning 18. People also qualify if they reached the age of 25 on or before July 1, 1977, and either lived in Canada, had some residency in the country after age 18, or held a valid Canadian immigration visa and spent the 10 years immediately before appying in Canada. For those who do not qualify for a full pension, a partial amount is paid out based on the number of years spent living in Canada. For instance, if a person has spent 36 years of their adult life in the country, they will earn 36/40th of the full OAS amount. Based on the eligibilty requirements, the minimum payout is one-quarter of the total, to account for a total of 10 years spent in Canada. Once a partial pension has been approved, the percentage of the total OAS pension received will never increase even if a person spends more years in Canada. (Matt Cardy/Getty Images)
What Is CPP?
The Canada Pension Plan is a form of retirement income that is open to all Canadians who have worked and paid into the system through deductions from their paycheques. The amount a person receives under the system depends on how much and for how long a person contributed, along with the age at which a person started receiving CPP payments. There are three types of CPP benefits: disability benefits, retirement pension and survivor benefits. For the purposes of clarity, this article focuses on retirement pension form of CPP. The average monthly CPP benefit in 2011 was $512.64. The maximum payment in 2012 is $987.67. The government adjusts the CPP rate every January to account for changes in cost of living as measured by the Consumer Price Index. According to Service Canada, "If you have lived and worked in Canada most years between age 18 and 65 and earned about the average Canadian wage ($39,100 in 2002), at age 65 you would receive a CPP retirement pension of about $788 a month." (Getty)
Who Is Eligible?
Anyone who has made a payment to CPP is eligible for full retirement pension benefits once they reach the age of 65. A person can begin receiving CPP anytime after age 60 if they stop working or reduce their income, although they incur a financial penalty by doing so. In 2012, a person receiving CPP early will be subject to a 0.52 per cent reduction for each month before the age of 65 that they received payments. That number is slated to rise to 0.6 per cent each month in 2016. On the other hand, if a person chooses to delay CPP payments they receive a similar increase for each month they wait between the age of 65 and 70. In 2012, that increase works out to 0.64 per cent per month and will rise to 0.7 per cent next year. (alamy)
When Should You Apply?
This is really up to the individual and whether they want to receive a smaller or larger CPP benefit. However, the government recommends applying six months before a person wants their pension to begin. Canadians can apply online or print out an application and deliver it to a Service Canada location. Similar to OAS, a person can receive retroactive payments covering up to 12 months if they delay applying for CPP until after their 71st birthday. (alamy)
How Much Do I Contribute To CPP?
A person contributes 4.95 per cent of of their total pensionable income -- set at a maximum of $50,100 in 2012 -- to a total of $2,306.70 in contributions per year. Their employer contributes an equivalent amount. Self-employed people, on the other hand, must contribute both portions. Anyone earning less than $3,500 is automatically exempt from CPP contributions. At age 70, a person stops contributing to CPP even if they continue working. (alamy)