Is It Time to Blowup the OAS … Is It Up to Those of Us Who Are Receiving It to Fix It?

es, I am going after one of the beloved sacred cows for seniors in Canada, the OAS. OAS provides a monthly pension payment to most seniors who are over 65 – because most of us meet the simple eligibility requirements. I am certainly in favour of the folks who really need it continuing to receive it. But, there are many boomers for whom it is just icing on the cake and who probably don’t need to receive it at all.

Most people… Retirees especially… don’t understand what a problem it has become. Something. needs to be done about it and quickly.

Let’s begin with a bit of a history lesson

From the Canadian Encyclopedia

“The old-age pension is a government initiative to help Canadians avoid poverty in retirement. It has changed from a strictly anti-poverty measure, that often humiliated the elderly, into an accepted, mainstream aspect of post-work life.”

I strongly suspect that a lot of that poverty among seniors was created by the fact that at the time it was initiated, women worked primarily in the home. As a result, there were far fewer workers in the economy than are now earning and saving towards retirement.

From the Government of Canada Publications Website

“In 1927, under the Old Age Pensions Act, the provincial and federal governments agreed to share the cost of means-tested old age pensions available to persons aged 70 and over. This legislation was superseded by the Old Age Security Act, which became effective on 1 January 1952 and provided universal, flat-rate old age pensions to Canadians 70 years of age and older who met residence requirements. The federal government assumed full responsibility for the program and financed it, in the early years, from the Old Age Security Fund, which was established as an account in the Consolidated Revenue Fund. “

Following that came…

“… the progressive reduction of the age of eligibility for the universal pension from age 70 in January 1965 to age 65 in January 1970”

This is my very simplified version of what took place. If you would like to read the whole story, it is available here on the Government of Canada Publications website.

OAS is a “Basic Income” for Seniors

It would be difficult not to have heard about the concept of a “Basic Income” being advocated for in Canada over the last several years. I suppose, in the interest of full disclosure I should point out that the Love-goddess is working with local and federal lobby groups to convince elected officials to work toward establishing a Basic Income Guarantee program for all Canadians.

But, this article is not about the basic income concept or the fight to get it nationally established. This is simply about the Old Age Security program, which in reality is a form of basic income for seniors. The difference between OAS and CPP is very simple. All working Canadians and their employers pay into the CPP fund so that at the end of our working lives, we start to receive it in a pension format. However, we paid nothing into OAS directly like we did for the CPP. OAS is simply free money for seniors that comes out of the greater tax pool. Hence, free money and very much a Basic Income for a select group.

As you have read above, it was invoked at a time when there were extremely high levels of poverty among seniors. That general argument is no longer the case.

According to the most recent Statistics Canada data, approximately 6 percent of Canadians aged 65 and older are classed as low-income. This compares to 11.1 percent of all other adults (18-65). Sadly, the group of seniors most inclined to experience poverty in old age are single women. Life for the boomers has been good and remains good… especially for couples. Yet, we are the ones receiving extra money from the government rather than the folks who really need it.

In case you are wondering if I will be addressing the Guaranteed Income Supplement (GIS), I will not. The reason being that it is a special supplement that only goes to individuals who are very much in need.

OAS Can Be Clawed Back

The good news… well, from my perspective anyway… is that in fact, OAS monies gifted to us can be clawed back by the government if we have higher incomes in retirement because it is “means-tested”. So, ultimately it is not entirely equally distributed to all Canadians. And when it comes right down to it, this is probably the aspect of the program that most annoys me. I think claw-back should take place sooner and quicker. Here is how OAS claw-back works.

OAS claw-back is officially referred to as the Old Age Security Pension Recovery tax, and you can read about it here.

Individually, in 2024, all seniors can have income up to $90,997 before the government starts to take some of the OAS money given to us back. They will claw-back 15% of any extra dollars of income you make after that amount. My simple example is as follows. If your income is $1000 over the threshold, they will claw back $150. I have inserted below the actual example from the Canada Revenue website because it explains the process in much greater detail. The example is from 2022 so the amounts don’t apply to 2024, but you should get the idea.

Also described on the website page and in the example is when you have to return that money to the government. The good news is – they don’t immediately start snatching it away from you, there is a bit of a grace period before they start to automatically claw-back the amount.

“Calculate the repayment amount

 

Your repayment calculation is based on the difference between your income and the threshold amount for the year. The first step is to figure out how much higher your income is than the threshold. You must repay 15% of that amount.

 

Example:

The threshold for 2022 is $81,761.
If your income in 2022 was $96,000, then your repayment would be 15% of the difference between $96,000 and $81,761:
$96,000 – $81,761 = $14,239
$14,239 x 0.15 = $2,136

You would have to repay $2,136 for the July 2023 to June 2024 period.”

To my way of thinking, $90,997 would seem to be a pretty decent income for a single person in Canada. That said, this probably will not be the case for all single people. Anyone still paying off a mortgage or who has a bunch of other loans outstanding may still have difficulty getting by. A good example of why everyone should try and go into retirement debt-free.

According to the Ernst and Young income tax calculator that I use, in Ontario, an individual with $90,997 in income would pay $18,824 in combined federal and provincial taxes in 2024 at the average tax rate of 20.69% and come out of it with an annual net amount of $72,713. This would provide them with ~ $6,060 per month to live on. This does not allow for any special tax deductions which may decrease the amount of tax paid.

Here Is a link to the Ernst and Young online tax calculator if you would like to determine exactly how much tax you will pay in Ontario or any other province… According to Ernst and Young anyway.

I suppose the good news is that when you reach the $90,997 level you don’t start losing all of your OAS. It is incrementally clawed-back back until you reach the point where it will all disappear and you will get nothing. More on that in a moment.

Couples vs Singles

Having had a quick look at how this might impact a single retired person, it’s time now to have a look at how that might impact a couple. Many couples, like the Love-goddess and me, both have had lengthy paid employment. The net result is that not only do they now draw reasonable CPP pension amounts and OAS, but being together probably also increased their ability to save and fund things like separate RRSPs and TFSAs.

One of the truly great perks in retirement for couples that single individuals cannot avail themselves of is the ability to split their retirement income. Not all things can be split, of course; the splitting of CPP and OAS is a no-go. But, according to the Government of Canada website, the following sources can be split by couples.

• the taxable part of life annuity payments from a superannuation or pension fund or plan
• if they are received as a result of the death of a spouse or common-law partner, or if the transferring spouse or common-law partner is 65 years of age or older at the end of the year:
– annuity and registered retirement income fund (RRIF), including life income fund payments
– registered retirement savings plan (RRSP) annuity payments
– certain qualifying amounts distributed from a retirement compensation arrangement

Key amongst these for many Canadians is the ability to split work pensions and RRSP/RRIF income. Many lucky couples get to divvy up their individual incomes for income tax purposes such that both end up declaring very close to identical incomes. What that means for OAS claw-back is that couples can often have a combined income of $148,065 before claw-back kicks in.

I suspect that most retired Canadian couples don’t have a combined income of $148,065, so there is a good chance that the majority of those folks never have to worry about any sort of claw-back. And even if they do, it’s a pretty small amount to begin with.

When Do We Lose It All?

There is an endpoint for claw-back at which you will lose everything, of course. I think this is the bit that really upsets me the most. Again, according to the Government of Canada website, in 2024, after starting to lose income to claw-back at $90,997 an individual does not lose all of it until they have an annual income of $148,065. For a couple who can split most of their income, it means that they will not lose every penny of OAS they collect until they have a combined income of $296,130.

Almost $300,000… are you kidding me????? I’m sorry, but to me, that is just plain wrong. Full OAS claw-back should happen… Especially for couples… Well before their combined incomes get to that point.

You Get Even More When You Hit 75!

People often say that the amount we receive in OAS isn’t that great an amount… the 2024 maximum monthly amount paid by OAS is $713.34 for people between the ages of 65 and 74, or $8,560.08 a year. For those individuals and couples who really are struggling financially in retirement, it is a godsend, but for many individuals and couples who have done well in their work careers, it is a nice bit of icing on the cake as I said previously.

To top it all off when you hit the age of 75 your OAS payment increases by 10% – more free money just for being 75 and older! Again, it is not immediately means-tested and is given out to everyone in the country who has reached that age. And when you get it, the upper limit for claw-back increases to $153,771 for an individual. Sheesh!

How Much Does All This Cost the Government?

Yes, the argument is often made that we pay taxes so it’s just getting some of our tax dollars back. That is true, but we get our tax dollars back in many, many ways during our lives. Most prominent amongst those is free healthcare.

Here is some important information that you need to know about the OAS that I do not think most retired Canadians appreciate fully if at all. It represents a major portion of tax revenue expenditures. When I first wondered about the cost, I went to ChatGPT and had it conduct a review and it came back with accurate figures. Thinking that many might not accept that as a reliable source, I went in search of documents produced by the government containing the relevant information, and this is what I found.

According to the “The Government’s Expenditure Plan and Main Estimates for 2024-25” as published by the “Office of the Parliamentary Budget Officer” the Government’s…

“main Estimates for 2024-25 outline $449.2 billion in budgetary spending”. Of that, approximately $81.1 billion in 2024-25 will be spent on what the government refers to as “Elderly Benefits”.

According to the document Elder Benefits–

“… are comprised of three complementary programs – Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and Allowance Payments. OAS is the largest federal program – responsible for roughly one in every seven dollars of federal spending. OAS provides a monthly pension payment to most seniors who are over 65 and meet the eligibility requirements”

The net result is that 18% of all tax dollars spent by the federal government are spent on Elderly Benefits. The OAS portion is close to $70 billion of the $81.1 billion to be spent – a significant amount of money. And of course, these numbers are going to increase every year as will you see if you peruse the document.

This is Unsustainable

From my perspective, making these broad, sweeping payments to seniors is largely unwarranted and unsustainable. It is time to revamp the OAS program to ensure that money goes to the people who need it and that those of us who can get by without it are weaned off it much more quickly than is currently happening.

This will not be an easy feat. All governments are reluctant to do things that adversely affect seniors. They are an enormous voting block.

I suppose the purpose of me going on this little rant and venting my feelings about the OAS is perhaps to inspire other retirees to come to the realization that is time for us to do something about it and start to put pressure on the government to take action. Nothing is going to happen unless our generation makes it happen. I see this as being part of our role as responsible citizens in one of the world’s greatest democracies. It will be our way of helping those who come after us.

A Simple Plan

All this thinking and writing about the OAS situation has made me realize I probably do need to come up with at least an alternative set of guidelines for OAS distribution and claw-back. I am a data-driven individual, and I feel very reluctant to just throw something out without knowing and understanding all the facts, but I’m going to do it anyway. 🙂 That said, the reason I am doing this is because I’m not keen on people who criticize things and never get around to offering at least their thoughts on a possible solution.

So, here is my first, quickie proposal… also known as the first thought that popped into my feeble brain 🙂

To begin, why not increase the claw-back starting point for single people … the folks who need it more than couples… to $100,000 in annual income and make it fully recoverable at $130,000. Let’s not begin by disadvantaging single people even more than they are already.

As for couples, why not make the baseline related to their combined income? So, an approach that might be reasonable is to begin claw-back when a couple’s combined income reaches $130,000. And then have their OAS payments fully eliminated when their joint income gets to $180,000. There you go, problem solved. 🙂 Feel free to send me your ideas on the matter if you do not agree.

There! I have had my say, thank you for listening. 🙂