The Broadbent Blog


Bigger clawbacks to Old Age Security not the answer

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Not content with the recent Harper government decision to trim program costs by raising the age of eligibility for Old Age Security and the Guaranteed Income Supplement (OAS/GIS) from 65 to 67, the Fraser Institute wants to withdraw OAS benefits from more seniors.

They propose to claw back OAS benefits from seniors with individual incomes of more than $51,000, instead of the current clawback level of $71,000. Under their proposal, benefits would be entirely lost at an income of $95,000, instead of the current $115,000.

The Fraser Institute says these changes are needed to make the OAS program fiscally sustainable, even though the Parliamentary Budget Officer has said that there is no major issue in this regard, and even though program costs are projected to increase only modestly from 1.7 per cent of gross domestic product to 2.4 per cent over the next two decades.

In any case, the Fraser Institute proposal would cut the annual cost of the OAS program by only about 2 per cent, according to their own estimates, not taking into account their proposal to reduce the current clawback rate of 15 per cent by an unspecified amount on additional income over the threshold.

The fundamental question is whether we should provide a basic OAS pension worth just over $6,500 a year to all seniors, or maintain and even increase a clawback for those with higher incomes.

The principle of a clawback is now well entrenched. It was introduced by the Mulroney Progressive Conservative government in 1989, and was maintained by the Liberals. The Chrétien government proposed to withdraw OAS benefits from higher-income seniors at a lower level based on family income in 1996, but backed off under political pressure.

The current clawback affects just 6 per cent of all seniors, and just over 2 per cent lose all of their benefits.

The argument that OAS benefits should not flow to the affluent tends to gloss over the point that the 15-per-cent clawback is added on top of regular income tax on OAS benefits. Even before the clawback rate of 15 per cent is levied on additional income, affluent seniors are taxed at a combined federal/provincial marginal rate of about 50 per cent on their OAS benefits in most provinces.

The principled argument for not clawing back OAS benefits is that all seniors should be entitled to a bare-bones public pension as a basic building block of the overall retirement income system. The OAS benefit is very low and is added to a meagre Canada Pension Plan benefit that replaces just 25 per cent of average earnings up to a maximum of $12,144 a year.

True, the very affluent do not need OAS. But this was equally true of OAS when it was introduced as a non-means-tested universal benefit in 1951 and a key building block of the postwar welfare state. The core idea was that universal benefits should be paid to all as a basic right of citizenship, and as an indication that all citizens should benefit from as well as pay taxes to support a strong social safety net.

Receiving the full OAS benefit – taxed at an already significant marginal rate – is a modest recompense for paying progressive income taxes over a working lifetime. And universality does not stand in the way of providing much more significant benefits to those who are most in need, as we do through the income-tested Guaranteed Income Supplement to OAS.

Experience shows that mean-testing previously universal benefits has undermined support for social security programs among the affluent. Certainly, the more narrowly targeted an income support program becomes, the more the political support for that program tends to evaporate.

Seen from this perspective, universality has benefits over and above the modest fiscal cost.

This article originally appeared in the Globe & Mail's Economy Lab.

Photo: bromfordgroup. Used under a Creative Commons BY-SA 2.0 licence.