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Plan for freedom at 67

OAS change a blow, but one many can absorb -- if they save now

Hey there, time traveller!
This article was published 24/4/2012 (1915 days ago), so information in it may no longer be current.

If you're age 48 or under, the recent announcement by the federal government old age security changes are coming down the pipe likely means your future self's wallet will be a little lighter when you hit age 65.

Arguing OAS must be sustainable in the future, the federal government revealed plans last month in the 2012 budget to raise the age of eligibility to 67 from 65 -- in 2023.

Now, that's pretty far down the road, so given all of the other financial challenges to juggle these days, you may be thinking: What's the big deal?

"Certainly, for younger people, 65 may seem like a million years away anyway," said Dave Ablett, director of tax and estate planning at Investors Group.

Even come 2023, the rule change will be phased in gradually over six years, so someone age 54 today may be missing out on only one month of payment. Undoubtedly, the phase-in period will help those born after 1948 and before Jan. 31, 1962, adjust -- more so for those at the older end of the spectrum.

But it's those of us born after 1962 who will feel the brunt of the rule change.

Adjusting today's maximum monthly benefit of $540.12 for inflation (about two per cent), this represents about $18,000 in lost income between ages 65 and 67.

At least from a glass-is-half-full view, there's plenty of time to prepare.

"What people should be asking themselves first is 'Would I have been dependent on those lost OAS payments as a major source of retirement income?' " Ablett said. "If the answer is 'no', they should continue with their current financial plan."

Indeed, individuals with substantial RRSP, TFSA and other savings may have no difficulty bridging the two-year gap. So too will people retiring with defined benefit pensions, which form the cornerstone of their retirement finances.

But the growing number of workers without pensions may be scrambling to save.

Or they'll simply be working longer, said economist Monica Townson.

Townson recently published a report for the Canadian Centre for Policy Alternatives (CCPA) called Old Age Security: Can we afford it?

The report came out weeks before the budget, but even then many people speculated changes were coming.

"The biggest impact will be on low-income seniors who will either be forced to go on working or receive welfare funded by the provinces," Townson said.

That's because those future retirees who might qualify for GIS -- the Guaranteed Income Supplement -- also won't receive it until age 67. Seniors who earn less than $16,368 as a single, or $21,648 as a couple, only qualify for GIS when they are eligible for OAS. (The maximum GIS payment is about $8,788 a year for 2012.)

So, those who may be most affected are going to be effectively hit with a double whammy.

And there could be a couple of million of those hurtin,' workin' folks. About 1.6 million seniors were receiving the GIS in 2006, according to Human Resources and Skills Development Canada.

It's realistic to assume a similar -- if not larger -- number of future retirees will be negatively affected.

In fact, the CCPA also published another report this past week pointing out just that: Low-income, working Canadians will be hit hardest by this policy shift.

In particular, women are most likely to be negatively affected.

"A lot of women have part-time or temporary jobs where there are no benefits and the earnings are very low," said Townson, not the author of the most recent report.

"Even though they get the Canada Pension Plan, which they can draw on early, the amount they will receive is quite low because that's an earnings pro-rated program."

The expectation is provincial social programs will have to pick up the slack in about 11 years when the changes come into play.

Retirement expert Daryl Diamond said it's likely about one-third of Canadians between 65 and 67 may need income assistance in Manitoba at that time. Yet, that's a scenario the federal government hasn't completely overlooked.

"Without much fanfare, the feds in announcing this said they were going to help bridge that issue for that group of people," said the author of Your Retirement Income Blueprint.

The other two-thirds of future seniors fall into two categories, he adds.

One group will have enough income they're not affected at all, because a portion of their old age security -- or all of it -- would be clawed back because they have high retirement or even employment incomes.

Or, there will be those who would be relying on OAS, but they are able to plan ahead, save and absorb the lost retirement income.

And that's likely the partial impetus behind the government's decision, he said.

The feds want to encourage Canadians to save more, because as baby boomers retire, the cost of these programs is expected to increase at a rate faster than revenues. The government even pointed to that fact in its recent budget, stating the cost for old age security programs -- currently $38 billion -- is expected to grow to $108 billion in 2030.

But Townson said the argument OAS is unsustainable in its current form is debatable.

"First of all, that figure is not adjusted for inflation, so we don't know what that will be in today's dollars," she said. (It's about $76 billion.) "Secondly, OAS costs a very small percentage of the total economy."

Today, OAS accounts for about 2.3 per cent of the gross domestic product (GDP). By 2030, it is estimated to be 3.1 per cent of GDP.

"Then it will fall back again to 2.6 per cent after that, so the increase in cost because of the aging population is less than one per cent of GDP, which is almost nothing, so to say it's unsustainable is simply not true."

Even the government's own Parliamentary Budget Officer recently reported OAS is sustainable in its current form and could actually have its benefit increased.

Given those facts, Townson said, it's unclear why the government announced the changes in the first place.

"It may be primarily to save money, but I think it's also part of their agenda to push people to save for themselves rather than have them count on the programs that everybody has contributed to like OAS."

Still, Ablett said these programs do represent a significant amount of the government's spending. About 16 cents of every dollar the federal government spends is on old age benefits.

"If the benefits they're paying for those programs increase at a faster rate than revenue, it means other social programs like health care could be squeezed," he said.

Although OAS's sustainability may be debatable, Diamond said it is likely better to err on the side of caution well in advance.

"What really would be a disaster is if they said, 'This is coming into play now and it applies to all instalments going forward,' " he said. "That is what they're doing right now in Greece, Spain and Italy because they didn't take steps earlier to rein this stuff in."


OAS changes

One OAS change coming very soon: Starting in July 2013, seniors can elect to delay their OAS by up to five years and, in turn, receive a higher monthly payment, says Dave Ablett with Investors Group. "For every month that OAS is delayed, the increase in the benefit is 0.6 of a per cent." That is 7.2 per cent for each year to a maximum of a 36 per cent increase over a five-year period.

Automatic for seniors: Changes to OAS/GIS rules also include automatic enrolment for all newly eligible seniors. The change will start in 2013, phased over two years. Under current rules, there's paperwork to fill out, and many low-income seniors miss out on the benefit. According to a 2005 report by the National Advisory Council on aging, about 300,000 Canadians were eligible for the GIS in 2001, but did not fill out the paperwork to receive the benefit. About 50,000 also did not receive OAS even though they qualified.

It's better to be old in Canada: According to a 2011 report on aging by the Conference Board of Canada, Canada is tops among its peers in terms of reducing poverty among seniors. Only the Netherlands had a poverty rate lower than Canada's 5.9 per cent rate. Canada's poverty level has largely fallen since the early 1970s when it was about 35 per cent. Incidentally, that happened to be about the same time OAS eligibility was reduced to age 65 from 70. The report also pointed out about one-fifth of Canadians will be age 65 or older by 2030, putting OAS and other programs at risk. It suggested the following ways to offset the effects of the aging boomers: increase immigration; introduce family friendly policies that increase fertility rates and develop policies to increase labour-force participation of older people.


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