THE SENIORS BENEFIT: SECURING THE FUTURE March 6, 1996 © Her Majesty the Queen in Right of Canada (1996). All rights reserved. All requests for permission to reproduce this work or any part thereof shall be addressed to the Department of Supply and Services - Canada Communication Group - Publishing. TABLE OF CONTENTS 1 Introduction Next Step 2 The Sustainability of Canada’s Retirement Income System The Old Age Security Program The Sustainability Problem Implications of Rising Public Pension Costs Making OAS/GIS Sustainable: Principles for Change 3 The Seniors Benefit Introduction Structure and Operation of the New System Impact of the Seniors Benefit Examples of the New System in Action Annex Projected Levels of the Seniors Benefit in 2001 Projected Benefits for Those Age 60 and Over 1 INTRODUCTION Over the past decades, Canada has built up a retirement income system as sound and effective as any in the world. The three pillars of the system - Old Age Security and the Guaranteed Income Supplement, the Canada and Quebec Pension Plans and private retirement savings - provide a balance of government and individual responsibility for retirement income security. But the system now faces a challenge from the ageing of our population. By 2030, the number of seniors in Canada will more than double. This will increase the cost of our public pension programs faster than our capacity to pay for them. Canadians are well aware of these problems and are concerned about the future sustainability of the retirement income system. A comprehensive plan To ensure that our retirement income programs will be there for future seniors, the federal government is re-affirming its commitment to all three pillars of the system and is putting forward a comprehensive program of actions to strengthen each of them. The budget includes measures to better target tax assistance for retirement saving. The federal, provincial, and territorial governments have jointly released an information paper on the Canada Pension Plan that will serve as a basis for consultations with Canadians starting this month. The paper outlines possible approaches to ensuring the sustainability of the CPP. The Seniors Benefit This paper outlines a proposal for a new Seniors Benefit to replace the Old Age Security (OAS) program and the Guaranteed Income Supplement (GIS), starting in 2001. The Seniors Benefit will better target OAS/GIS benefits to substantially reduce their long term cost burden. Future seniors with high incomes will receive less; those with low or modest incomes will be fully protected. In fact their benefits will be higher than they are under OAS/GIS. The pensions of all current seniors will be protected. Those who were 60 years of age as of January 1 of this year, and their spouses, regardless of their age, will be treated the same as current seniors. By introducing changes now that will strengthen each component of Canada’s retirement income system in the future, the federal government is taking the action necessary to preserve our retirement income system for future generations. NEXT STEPS The government intends to introduce legislation to the House of Commons later this year. Once the legislation is introduced, the proposal will be the subject of hearings by a Parliamentary committee. These hearings will provide an opportunity for public comment and input. In the intervening period, submissions and comments on the Seniors Benefit are welcomed. Interested groups and individuals are invited to submit comments to the Minister of Finance or the Consultations and Communications Branch of the Department of Finance or the Minister of Human Resources Development at the following addresses. Mail addresses: The Honourable Paul Martin Minister of Finance Room 515S, Centre Block House of Commons Ottawa, Ontario K1A 0A6 or The Honourable Pierre Pettigrew Minister of Human Resources Development Canada 140 Promenade du Portage Phase IV, 14th Floor Hull, Quebec K1A 0J9 or Consultations and Communications Department of Finance L’Esplanade Laurier 19th Floor, East Tower 140 O’Connor Street Ottawa, Ontario K1A 0G5 Public Enquiries Office Human Resources Development Canada 140 Promenade du Portage, Level 0 Hull, Quebec K1A 0J9 Internet Homepage sites: Finance Canada at: http://www.fin.gc.ca/ Human Resources Development Canada at: http://hrdc-drhc.gc.ca/hrdc/isp /ispind_e.html (English) http://hrdc-drhc.gc.ca/hrdc /isp/ispind_f.html (French) E-Mail messages to Minister Martin at: pmartin@fin.gc.ca E-Mail messages to The Honourable Pierre Pettigrew at: pierre.pettigrew@hrdc-drhc.gc.ca 2 THE SUSTAINABILITY OF CANADA’S RETIREMENT INCOME SYSTEM Canada’s retirement income system provides a basic income guarantee for seniors and helps Canadians avoid a serious disruption in their living standards at retirement. Under this system, responsibility for the provision of pension income is shared between government and individual Canadians. There are three major components of government support for retirement incomes. Old Age Security Program. Three public pension benefits - Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Spouses Allowance (SPA) - provide seniors with a basic income guarantee. These benefits are provided out of the general revenues of the federal government. The Canada and Quebec Pension Plans (CPP and QPP). The CPP and QPP are compulsory, contributory public pension plans which provide earnings-related benefits to Canadian workers and their families for retirement and in the event of disability or death. The CPP operates in nine provinces and the territories of Canada while the QPP, a parallel plan, operates in Quebec. The CPP is described in more detail in a recently released federal/provincial/territorial document entitled An Information Paper for Consultations on the Canada Pension Plan. Tax Assistance for Retirement Saving. The tax system encourages retirement saving in registered pension plans (RPPs), deferred profit sharing plans (DPSPs) and registered retirement savings plans (RRSPs) by applying a simple principle. Within clear limits, income set aside for retirement is taxed when it is received, not when it is saved. The effect is to defer taxation on both the original amounts saved and the investment earnings on them. SOURCES OF PENSION INCOME Canada’s retirement income system will provide an estimated $76 billion in pension income in 1996. About 60 per cent comes from public pensions: $22 billion from OAS/GIS and $22 billion from the CPP and QPP. Payments from RPPs, DPSPs and RRSPs make up the other 40 per cent of Canadians’ pension income - $32 billion. About $26 billion comes from employer-sponsored pension plans and DPSPs and $6 billion from RRSPs. Chart 1 (not available) THE OLD AGE SECURITY PROGRAM Old Age Security (OAS) provides a maximum benefit today of about $4,760 a year to Canadians age 65 and over based on the recipient’s years of residence in Canada. Benefits are taxable, and higher-income seniors repay some or all of their benefits to the federal government. The OAS repayment is 15 cents for each dollar of individual income over $53,215. For single seniors, benefits are fully recovered at an income of about $85,000. For couples, benefits continue to be paid up to incomes of $170,000 or more. The Guaranteed Income Supplement (GIS) provides additional benefits to low-income seniors based on the combined income of the recipient and his/her spouse. Together, OAS and GIS provide maximum annual payments of about $10,420 for a single senior and about $16,900 for a couple. GIS benefits are reduced by 50 cents for each dollar of income from other sources. As income from the CPP and QPP and private pensions has grown, the proportion of seniors receiving GIS has fallen from 58 per cent in 1973 to 40 per cent in 1995. The Spouse’s Allowance (SPA) provides an income-tested benefit to individuals age 60-64 who are spouses of OAS pensioners, or are widowed. The benefit is equivalent to OAS and GIS. Several provinces and territories add supplements to federal GIS and SPA benefits. The following table summarizes federal expenditures on these programs and shows the number of recipients. Federal Pension Benefits: Number of recipients and projected expenditures in 1996 ___________________________________________________________ Recipients Expenditure (millions) ($ billion) Old Age Security (gross) 3.6 16.5 Guaranteed Income Supplement 1.4 4.8 Spouse’s Allowance 0.1 0.4 ___________________________________________________________ Total 3.7 21.7 THE SUSTAINABILITY PROBLEM Canada’s balanced system of public and private pensions is widely seen as one of the best in the world. However, the future affordability of our public pension programs is challenged by major demographic and economic changes that have occurred since these programs were developed in the 1960s. These challenges must be addressed to ensure that the programs will be preserved for tomorrow’s seniors. Demographic changes Canadians are living considerably longer than they did in the mid-1960s when the CPP/QPP and the OAS/GIS systems were put in place, and this trend is expected to continue. As a result, pension benefits are paid out over a much longer time - three years longer than in 1966 at present and 4.5 years longer by 2030. The postwar baby boom and the subsequent baby bust (the sharp drop in birth rates beginning in the late 1960s) will have an even bigger impact on public pension costs. The baby boom generation will start to retire in large numbers around 2011. By 2030, there will be 8.8 million seniors, more than double today’s number of 3.7 million. And as a result of the baby bust, there will be relatively fewer younger Canadians in the workforce to support the escalating pension bill. Over the next decade, there will be about five working age Canadians to help support each person age 65 and over. By 2030, there will be only three working age Canadians for every person age 65 and over. Economic growth Slower growth in productivity and wage levels will compound the demographic problem by reducing the capacity of working age Canadians to finance growing public pension costs. It would simply not be responsible to count on a return to the high wage growth or high labour force growth of the 1960s and 1970s to make our public pensions affordable. IMPLICATIONS OF RISING PUBLIC PENSION COSTS Public pensions make up a large and growing share of government spending. OAS/GIS costs account for nearly one-fifth of federal program spending, and this share is projected to grow rapidly over the next 35 years. Together with the pressures of an ageing population on health and social services costs, these projected spending increases could restrict the government’s ability to support other valued programs and services. In the end, these challenges come down to two questions: - Will young Canadians be willing and able to support the public pension system? - Will the programs be there for today’s youth when they retire? It is crucial that we take action now to make our public pensions sustainable and affordable. MAKING OAS/GIS SUSTAINABLE: PRINCIPLES FOR CHANGE The government has made a commitment that in any change to the public pension system, the OAS/GIS payments of today’s seniors would be fully protected. In addition, the 1995 budget set out basic principles for changing OAS/GIS to make these programs affordable and sustainable: - undiminished protection for all seniors who are less well off; - a continuation of full indexation of benefits; - provision of OAS on the basis of the combined income of spouses (as is currently the case under GIS); - greater progressivity of benefits by family income level; and - control of program costs. 3 THE SENIORS BENEFIT INTRODUCTION The new Seniors Benefit will replace the existing OAS/GIS benefits. It will be completely tax free and will incorporate the existing age and pension income tax credits. It will begin in 2001. The key features of the proposed Seniors Benefit are: - the new benefit will be implemented in a manner that meets the government’s commitment to today’s seniors that their OAS and GIS payments will not be reduced. In fact, this commitment will be broadened to apply to everyone age 60 and over as of December 31, 1995; - the vast majority of seniors will be as well or better off - 75 per cent of single seniors and couples will receive the same or higher benefits. Nine out of 10 single senior women will be better off; - those most in need will be protected: and in addition, GIS recipients will receive $120 a year more; - the benefit levels and threshold will be fully indexed to inflation. This is an improvement over the current system where the thresholds are not fully indexed; - for couples, the amount of the payment will be determined on the basis of the combined income of spouses, as is the case now with the GIS; - benefits will be delivered in a single monthly payment, which for couples will be made in separate and equal cheques to each spouse; and - the Spouse’s Allowance Program will remain in place and payments will be increased by $120 per year. Giving seniors a choice Canadians who have currently reached, or are approaching age 65 have limited opportunity to make adjustments in their financial affairs. The new benefit will be implemented in 2001 to provide substantial notice before any changes take effect. In addition, all Canadians who reached age 60 by December 31, 1995 (i.e. who qualify for OAS/GIS by December 31, 2000) will have the choice of moving to the new system or keeping their monthly OAS/GIS payments, as currently structured, for the rest of their lives. (These payments will continue to be fully indexed, and OAS payments will continue to be taxable and subject to the current high-income recovery.) This means that every current senior and those over the age of 60 will receive, at the least, the same payment as they do now. If the new system turns out to be better for them, they will be able to choose the new system. In couples where only one spouse is age 60 or over, both spouses will be eligible to receive OAS when they reach age 65. Seniors may also opt into the Seniors Benefit at any time. STRUCTURE AND OPERATION OF THE NEW SYSTEM Benefit levels The maximum payments in 2001 under the Seniors Benefit will be equal to $120 more than the maximum combined payments under OAS/GIS in 2001. The table below shows the targeting of assistance under the new benefit. (The Annex contains more detailed information on benefit levels under the new system). For example, single seniors with no other income will receive $11,420 tax free a year. Elderly couples with no other income will receive $18,440 tax free a year. For those with other income, these levels will decline as their income from other sources increases. Projected level of the Seniors Benefit in 2001 ___________________________________________________________ Income from Tax-Free Benefit other sources[1] Single seniors Elderly couples ___________________________________________________________ (dollars per year) 0 11,420 18,440 5,000 8,920 15,940 10,000 6,420 13,440 15,000 5,160 10,940 20,000 5,160 10,320 25,000 5,160 10,320 30,000 4,350 9,510 35,000 3,350 8,510 40,000 2,350 7,510 45,000 1,350 6,510 50,000 350 5,510 60,000 - 3,510 70,000 - 1,510 80,000 - - [1] Includes income from CPP/QPP, but excludes income from OAS/GIS, which the Seniors Benefit replaces. Couples where one spouse is under age 65 Under the new system, in couples where one spouse is under age 65 and the other is over age 65, the older spouse will be eligible for the Seniors Benefit. The Spouse’s Allowance Program (SPA) will remain in place, so the younger spouse may be eligible for SPA if he or she is between 60 and 64 and the couple has a low income. The maximum level of assistance to these couples will be increased by $120 a year in 2001. The maximum level of SPA for widows and widowers will also be increased by $120 a year. Full indexation The new system entrenches the principle of inflation protection for assistance to seniors. This is especially important for lower-income seniors who depend on these benefits for the bulk of their income. The Seniors Benefit fully indexes the benefit levels and also extends full indexation to the threshold where benefits begin to be reduced. This is an improvement over the current system where the threshold is not fully indexed. Combined-income testing Under the new system, the payments are targeted on the basis of the combined income of spouses. This is the way GIS has always been calculated. Couples receiving GIS already have their benefits determined on the basis of the combined income of spouses. Since the incomes of low-income couples are currently combined to determine eligibility for additional help, it is also appropriate to combine the incomes of higher-income couples to determine the level of their benefits. This targeting allows costs to be reduced while lower-income seniors are protected, and it ensures fairness and equality in the treatment of all couples, regardless of how their income is split between spouses. Relationship to the tax system The Seniors Benefit will be simpler for seniors because it will be delinked from the tax system. Under the current system, seniors are subject to a variety of complex tax provisions that have the net effect of reducing the after-tax value of their OAS/GIS benefits: - OAS benefits are taxable and are partially or fully recovered from individuals with income over $53,215; - seniors with incomes up to $49,134 qualify for a full or partial age credit; - a pension income credit is provided on the first $1,000 of pension income; and - OAS and GIS income is taken into account in calculating tax credits (such as the spousal credit and the GST credit). The Seniors Benefit will be tax free. Benefits will not have to be reported on the tax return, will not be recovered at tax time, and will not be taken into account when calculating refundable tax credits. When the Seniors Benefit is introduced in 2001, the age and pension income credits will be eliminated. Where seniors choose to continue receiving OAS/GIS rather than the Seniors Benefit, OAS will remain taxable and subject to the current high-income recovery. Operation of the new system Seniors will have to apply for the benefit only once when they turn 65. The level of benefits will be automatically recalculated each year, based on the previous year’s tax return. In the case of couples, the monthly payment will be split and sent each month in separate and equal cheques to each spouse. Seniors will be able to request that their payments be adjusted immediately to take into account marital breakdown or death of a spouse. They will also be able to request an adjustment during the year to take into account a permanent drop in income in circumstances such as retirement. IMPACT OF THE SENIORS BENEFIT Preserves pensions for future generations The new Seniors Benefit will slow the long-term growth in the cost of public pensions that are paid out of the government’s general revenues. It will do this by better targeting assistance to those most in need. This represents a major step forward in making the retirement income system more sustainable and affordable and preserving benefits for future generations of seniors. Savings in the first year of implementation will be small because all seniors who receive OAS before 2001 have the choice of keeping these payments. But the annual cost savings to the federal government from this new system will build after its implementation in 2001. The average income of seniors is expected to continue to grow faster than the rate of inflation in the coming decades. This means seniors will rely less on the new benefit. As a result, savings from the targeting under the new system will rise. The following table shows how the new system slows the growth in costs over the long-term. Projected net federal costs ___________________________________________________________ 1996 2001 2011 2030 ___________________________________________________________ ($ billion) Current System Gross OAS/GIS payments[1] 21.7 26.3 37.6 87.7 Net tax on OAS[2] -0.9 -1.6 -3.2 -10.4 _______________________________ Net Cost 20.8 24.7 34.4 77.3 New System Tax-Free Seniors Benefit[1] - 22.0 30.9 69.1 Gross OAS payments (for those who keep OAS) - 3.9 2.4 [3] Net tax on OAS[2] - -1.4 -1.0 [3] _______________________________ Net cost - 24.5 32.3 69.1 __________________________________________________________ Net Saving - $ billions - 0.2 2.1 8.2 - per cent of program costs - 0.7 5.7 10.7 ___________________________________________________________ [1] Includes Spouse’s Allowance. [2] In the current system, the net tax on OAS includes the high-income recovery and federal income taxes paid on OAS, minus the effect of the age and pension income tax credits. In the new system, it includes only the recovery and income taxes paid, since the age and pension income credits will no longer exist. [3] Less than $100 million. By 2011, when the first baby boomers reach age 65, the net cost savings are projected to be 5.7 per cent of projected costs under the current system. By 2030, when the cost pressures on public pensions reach their peak, the net savings from the Seniors Benefit are projected to reach about 10.7 per cent of program costs. Creates a fairer system of benefits It should be emphasized that savings come from slowing the rate of growth in program costs. The Seniors Benefit will create a fairer system of benefits by targeting and increasing assistance to low- and modest-income single seniors and couples. It will also eliminate the current distortions in the treatment of senior couples caused by income testing on an individual, instead of a combined basis. The new system will increase payments to seniors, both individuals and couples, who currently receive GIS by $120 per year. Since the payments under the Seniors Benefit will be completely tax free, they will often be worth more for seniors than the existing payments. As a result, many modest- and middle- income seniors with incomes above the GIS range will be better off under the Seniors Benefit. This will occur because moving from taxable OAS to the tax-free Seniors Benefit will reduce their income taxes and increase their GST credit payments. In general, single seniors as well as couples with incomes (including OAS/GIS) up to approximately $40,000 will receive the same or higher benefits. Single seniors with incomes above $40,000 will receive less. Among couples with incomes between $40,000 and $45,000, some will receive higher benefits and some lower benefits, depending on their exact tax situation under the current system. Those couples with incomes above $45,000 will receive lower benefits, and seniors with much higher incomes will no longer receive any government assistance at all. Chart 2 (not available) The vast majority of single seniors and couples have incomes under $40,000 today. The chart below shows that the majority of seniors have relatively modest incomes. In 1996, 46 per cent of seniors are estimated to have incomes below $20,000 and rely heavily on OAS and GIS to meet their needs, and a further 33 per cent have total incomes between $20,000 and $40,000. Only 5 per cent have incomes over $75,000. If all single seniors and couples were under the new system in 2001, 75 per cent of them would receive the same or higher benefits, (almost all of whom would receive higher benefits). About 16 per cent with higher incomes would continue to receive benefits, but at a lower level. Those with the highest incomes - 9 per cent - would no longer receive any government assistance. The next chart compares the projected level of assistance in 2001 under the current system and the proposed Seniors Benefit for typical single seniors. Chart 3 (not available) Under the new benefit, 9 out of 10 single women will receive increased assistance. (Women make up about 58 per cent of the seniors population, and many are single with low or modest incomes.) The better targeting of assistance under the Seniors Benefit will help this group of seniors. In general, single seniors with annual incomes under the current system (including OAS/GIS) up to approximately $40,000 will receive higher benefits as a result of the shift to the Seniors Benefit. Once in the new system, single seniors will no longer receive government assistance when their annual income exceeds $52,000. The next chart compares the projected level of assistance in 2001 under the current system and the Seniors Benefit for typical couples. Chart 4 (not available) Under the current system, through most of the middle- and upper-income ranges, two-income couples (couples where both spouses have incomes other than OAS/GIS) receive significantly higher levels of assistance than one-income couples, even when both these couples have the same combined income. The extra benefits for two-income couples arise because their combined income is split between two individuals, so they are less affected by the individual-based taxation and recovery of benefits than one-income couples. The Seniors Benefit eliminates this distortion. All couples will now be treated in exactly the same way. As a result, two-income couples with annual incomes under the current system (including OAS/GIS) of less than $40,000 will generally receive higher benefits as a result of the shift to the new system. One-income couples with annual incomes under the current system (including OAS/GIS) up to approximately $45,000 will receive higher benefits. Once in the new system, senior couples will no longer receive assistance when their annual income exceeds $78,000. EXAMPLES OF THE NEW SYSTEM IN ACTION The following pages provide examples of how the new system will affect typical single seniors and couples in 2001. In these examples, the calculation of after-tax benefits under the current system takes into account federal income taxes and provincial income taxes for a typical province. Isabella Isabella, a widow, is 77 today. In 2001 she will have no income other than OAS and GIS. Under the current system, Isabella would receive $5,160[1] a year in OAS plus the maximum GIS of $6,140. She would not pay any income taxes, so her net benefit and total income under the current system would be $11,300. Under the new system, Isabella will choose the Seniors Benefit over her current OAS and GIS since it will provide her with an increase in benefits of $120 a year. Benefits for Isabella in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) GIS payments 6,140 New payments 11,420 OAS payments 5,160 Tax on OAS 0 ___________________________________________________________ Net benefit 11,300 Net benefit 11,420 Net gain $120 Income after taxes[1] $11,600 $11,720 ___________________________________________________________ [1] Includes the maximum GST credit of $300 a year. Jane and Dale Dale, a retired fisherman, is age 74 today. Jane is 73. In 2001, Dale will receive $4,300 a year from the Canada Pension Plan and $3,700 from his registered retirement income fund. Jane has no private pension or investment income. Their combined income, excluding OAS, will be $8,000. Under the current system, Dale and Jane would each receive $7,160 a year in combined OAS/GIS payments. Their total income, including OAS/GIS, would be $22,320. Under the current system, the income tax on Dale’s OAS would be fully offset by his age credit and the transfer of Jane’s age credit, so neither spouse would pay income tax. Under the current system, their net benefits would be $14,320. Under the new system, Jane and Dale will choose to move to the Seniors Benefit instead of keeping their OAS/GIS payments because the Seniors Benefit will provide them with tax-free payments of $14,440 a year - a net gain of $120. Benefits for Jane and Dale in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) GIS payments 4,000 New payments 14,440 OAS payments 10,320 Tax on OAS -1,480 Age credit 1,480 Pension credit - ___________________________________________________________ Net benefit 14,320 Net benefit 14,440 Net gain $120 Income after taxes[1] $22,720 $22,840 ___________________________________________________________ [1] Includes maximum GST credit of $400. Mary Mary, a widow, is 70 today. In 2001, she will receive a survivors benefit under the Canada Pension Plan of $5,350 a year, and interest income of $4,650 from guaranteed investment certificates. Her income, excluding OAS, will be $10,000. Under the current system, Mary would receive $5,160 a year in OAS and a further $1,140 in GIS. Her total income in that year, including government benefits, would be $16,300. Under the current system, Mary would have to pay income taxes on her OAS even though she would qualify for GIS. She would be eligible for the age credit, but not the pension income credit since Canada Pension Plan benefits do not qualify for the credit. Mary’s net benefits would be $5,840 a year. Mary will choose to move to the Seniors Benefit instead of keeping her OAS payments because the Seniors Benefit will provide her with tax-free payments of $6,420 a year - a gain of $580. While her payments are $120 a year higher under the Seniors Benefit, her net gain is larger because the new payments are completely tax free. Benefits for Mary in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) GIS payments 1,140 New payments 6,420 OAS payments 5,160 Tax on OAS -1,410 Age credit 950 __________________________________________________________ Net benefit 5,840 Net benefit 6,420 Net gain $580 Income after taxes $15,170 $15,750 ___________________________________________________________ Peter and Martha Peter, a retired mechanic, is age 62 today. Martha, a home-maker, is 61. In 2001, Peter will receive $5,900 a year from the Canada Pension Plan and $7,200 in pension income from his former employer. He will also receive $4,900 in interest income from guaranteed investment certificates. Martha has no private pension or investment income. Their combined income, excluding OAS, will be $18,000. Under the current system, both Martha and Peter would receive $5,160 a year in OAS payments. Their total income, including OAS, would be $28,320. Under the current system, Peter would have to pay income taxes on OAS, and his spousal credit would be reduced on account of Martha’s OAS. He would claim the pension income credit, an age credit for himself, and a transfer of Martha’s age credit. When all the tax interactions are taken into account, Martha and Peter’s net benefits would be $9,710. Martha and Peter will choose to move to the Seniors Benefit instead of keeping their OAS payments because the Seniors Benefit will provide them with tax-free payments of $10,320 a year - a net gain of $610. Benefits for Peter and Martha in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 10,320 New payments 10,320 Tax on OAS -2,790 Age credit 1,910 Pension credit 270 ___________________________________________________________ Net benefit 9,710 Net benefit 10,320 Net gain $610 Income after taxes $26,420 $27,030 ___________________________________________________________ Kei Kei, a retired factory worker, is 59 today. In 2001, she will receive $13,500 in pension income from her former employer, $7,300 from the Canada Pension Plan and $1,200 in interest income from guaranteed investment certificates. Her income, excluding OAS, will be $22,000. Under the current system, Kei would receive $5,160 a year in OAS. Her total income, including OAS, would be $27,160. Under the current system, Kei would pay income tax on her OAS. She would claim a partially income-tested age credit and the pension income credit. Her net benefits under the current system would be $4,860. Under the new system, Kei does not meet the age requirement for choosing OAS but it does not matter because she is better off under the new system. The new payments are equal to her current OAS payments, but are worth more because they are tax free. She has a net gain of $300. Benefits for Kei in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 5,160 New payments 5,160 Tax on OAS -1,470 Age credit 900 Pension credit 270 ___________________________________________________________ Net benefit 4,860 Net benefit 5,160 Net gain $300 Income after taxes $22,910 $23,210 ___________________________________________________________ Stephen Stephen, a retired automobile salesperson, is 60 today. In 2001, Stephen will receive $23,500 from his registered retirement income fund, $6,900 from the Canada Pension Plan, and $1,600 in investment income from his stocks and bonds. His income, excluding OAS, will be $32,000. Under the current system, he would also receive $5,160 in OAS, for a total income of $37,160. Under the current system, Stephen would be eligible to claim the pension income credit and a partially income-tested age credit. When all the taxes and tax credits are taken into account, Stephen would receive $3,770 in net benefits. Stephen will choose to move to the Seniors Benefit instead of keeping OAS. Under the Seniors Benefit, he will receive $3,950 a year in tax-free payments - a net gain of $180. Benefits for Stephen in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 5,160 New payment 3,950 Tax on OAS -2,150 Age credit 490 Pension credit 270 ___________________________________________________________ Net benefit 3,770 Net benefit 3,950 Net gain $180 Income after taxes $28,430 $28,610 ___________________________________________________________ Antonio and Carolina Antonio, age 62 today, operates a small business. Carolina, 63, is a home-maker. In 2001, Antonio will have $31,300 in income from his business and $4,700 from the Canada Pension Plan. Carolina has no income other than OAS. Their combined income, excluding OAS, will be $36,000. Under the current system, both would receive $5,160 in OAS. Their total combined income, including OAS, would be $46,320. Under the current system, Antonio would pay income tax on OAS, would have his spousal credit reduced by Carolina’s OAS. Antonio would claim a partially income-tested age credit and a transfer of Carolina’s age credit, but not the pension income credits since CPP benefits do not qualify for the credit. When all the tax interactions are taken into account, their net benefits would be $8,180. Under the Seniors Benefit, they would receive tax-free payments of $8,310 a year, resulting in a net gain of $130. Benefits for Antonio and Carolina in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 10,320 New payment 8,310 Tax on OAS -3,420 Age credit 1,280 ___________________________________________________________ Net benefit 8,180 Net benefit 8,310 Net gain $130 Income after taxes $36,640 $36,770 ___________________________________________________________ Correcting the Inequity In the following two examples Dimitri and Katrina would receive higher benefits under the current system than Boris and Elizabeth despite the fact that they have the same combined income. The new benefit will eliminate this inequity and provide equal assistance to couples with the same incomes. Dimitri and Katrina Dimitri, a retired insurance agent, is age 59 today. Katrina, a retired payroll clerk, is also age 59. In 2001, Dimitri will receive $14,750 a year from his registered retirement income fund, $5,300 from the Canada Pension Plan and $3,950 from his investments. Katrina will receive $9,700 a year in pension income from her former employer and $6,300 from the Canada Pension Plan. Their combined income, excluding OAS, will be $40,000. Under the current system, both Katrina and Dimitri would receive $5,160 a year in OAS payments. Their total family income, including OAS, would be $50,320. Under the current system, Dimitri would have to pay income tax on OAS, but would claim a partially income-tested age credit and a pension income credit. Katrina would claim a full age and pension income credit for herself. When all the tax interactions are taken into account, their net benefits would be $9,820 a year. Dimitri and Katrina do not meet the age requirement for choosing to keep OAS, so they will automatically move to the Seniors Benefit in 2001 where they will receive tax-free payments of $7,510 a year - a net loss of $2,310. Benefits for Dimitri and Katrina in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 10,320 New payments 7,510 Tax on OAS -2,820 Age credit 1,770 Pension credit 550 ___________________________________________________________ Net benefit 9,820 Net benefit 7,510 Net reduction $2,310 Income after taxes $42,410 $40,100 ___________________________________________________________ Boris and Elizabeth Boris, a retired plant manager, is age 59 today. Elizabeth, a community hospital volunteer, is also 59. In 2001, Boris will receive $30,800 in pension income from his former employer and $9,200 from the Canada Pension Plan. Elizabeth will have no income other than OAS. Their combined income, excluding OAS, will be $40,000. Under the current system, both would receive $5,160 a year in OAS payments. Their total family income, including OAS, would be $50,320. Under the current system, Boris would pay income taxes on his OAS and have his spousal credit reduced by Elizabeth’s OAS. He would claim a pension income credit, a partially income-tested age credit and a transfer of Elizabeth’s age credit. Their net benefits would be $8,290. Boris and Elizabeth do not meet the age requirement for choosing to keep OAS, so they will automatically move to the Seniors Benefit in 2001. Their tax-free payments under the new system will be $7,510 a year - a net loss of $780. Boris and Elizabeth will have a smaller loss under the new system than Dimitri and Katrina. Both couples will receive the same level of benefits under the new system, but Boris and Elizabeth would receive less under the current system. Because their income is all in the hands of one spouse, they lose more from the individual-based taxation of OAS and income test of the age credit than Dimitri and Katrina, whose income is split almost evenly. Benefits for Boris and Elizabeth in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 10,320 New payments 7,510 Tax on OAS -3,420 Age credit 1,120 Pension credit 270 ___________________________________________________________ Net benefit 8,290 Net benefit 7,510 Net reduction $780 Income after taxes $39,080 $38,300 ___________________________________________________________ Karen and Gerard Karen is 67 today. Gerard a retired consultant, is 64. In 2001, Gerard will withdraw $20,800 from his registered retirement income plan, receive $28,450 in investment income and $8,750 from the Canada Pension Plan. Karen has no income other than OAS. Their combined income, excluding OAS, will be $58,000. Under the current system, both would receive $5,160 in OAS. Their total family income, including OAS, would be $68,320. Under the current system, Gerard would pay income tax on OAS, would have his spousal credit reduced by Karen’s OAS, and would repay $1,490 of his OAS through the high-income recovery. Gerard’s income would be too high to claim the age credit, but he would claim a transfer of Karen’s age credit, as well as the pension income credit. When all the tax interactions are taken into account, their net benefits would be $7,130. Under the Seniors Benefit, they would receive $3,910 a year, resulting in a loss of $3,220. Therefore, they will choose to keep their OAS payments, which will leave them with a net benefit of $5,910 after taxes and recoveries. Their income taxes will increase by $1,220 a year because of the elimination of the age and pension income credits. Benefits for Karen and Gerard in 2001 ___________________________________________________________ Current system Seniors Benefit Keep OAS payments ___________________________________________________________ (dollars per year) OAS New OAS payments 10,320 Payment 3,910 payments 10,320 OAS OAS recovery -1,490 recovery -1,490 Tax on Tax on OAS -2,920 OAS -2,920 Age credit 950 Age credit 0 Pension Pension credit 270 credit 0 ___________________________________________________________ Net benefit 7,130 Net Net benefit 3,910 benefit 5,910 Net reduction $1,220 Income after taxes $48,380 $47,160 ___________________________________________________________ Shannon and Kevin Shannon, a semi-retired partner in an accounting firm, is 64 today. Kevin, a retired teacher, is 67. In 2001, Shannon will receive $21,000 in partnership income from her firm, $16,000 in investment income, $7,400 from the Canada Pension Plan, and $9,600 from her registered retirement income plan. Kevin will receive a pension of $29,000 from his former school board and $7,000 from the Canada Pension Plan. Their combined income, excluding OAS, will be $90,000. Under the current system, both would each receive $5,160 in OAS. Their total income, including OAS, would be $100,320. Under the current system, Shannon and Kevin would both pay income tax on OAS, and Shannon would repay $890 of her OAS through the high-income recovery. Shannon’s income would be too high to claim the age credit while Kevin would be able to claim a partial age credit. Both would claim the pension income credit. They would receive $6,350 in net benefits. Under the Seniors Benefit, their benefits would drop to zero, resulting in a loss of $6,350. Therefore, Kevin and Shannon will choose to keep their OAS payments, which will leave them with a net after-tax benefit of $5,480. They will face an income tax increase of $870 a year because of the elimination of the age and pension income credits. Benefits for Shannon and Kevin in 2001 ___________________________________________________________ Current system Seniors Benefit Keep OAS payments ___________________________________________________________ (dollars per year) OAS New OAS payments 10,320 Payment 0 payments 10,320 OAS OAS recovery -890 recovery -890 Tax on Tax on OAS -3,950 OAS -3,950 Age credit 330 Age credit 0 Pension Pension credit 540 credit 0 ___________________________________________________________ Net Net Net benefit 6,350 benefit 0 benefit 5,480 Net reduction $870 Income after taxes $70,790 $69,920 ___________________________________________________________ Rod and Heather Rod, a psychiatrist, is age 59 today. Heather is also 59. In 2001, Rod will still be working. He will earn $98,500 from his practice and will recieve $21,500 in investment income from stocks and bonds. Heather has no income other than OAS. Their combined income, excluding OAS will be $120,000. Under the current system, both would receive $5,160 in OAS. Their total family income, including OAS, would be $130,320. Under the current system, Rod would repay all of his OAS through the high-income recovery and would have his spousal credit reduced by Heather’s OAS. Rod’s income would be too high to claim the age credit, but he would claim a transfer of Heather’s age credit. When all the tax interactions are taken into account, their net benefits would be $4,830. Under the new system, Rod and Heather do not meet the age requirement for choosing to keep the OAS, so they will automatically move to the Seniors Benefit in 2001 where they will no longer receive government assistance. They will have a net loss of $4,830 a year. Benefits for Rod and Heather in 2001 ___________________________________________________________ Current system Seniors Benefit ___________________________________________________________ (dollars per year) OAS payments 10,320 New payments 0 OAS recovery -5,160 Tax on OAS -1,310 Age credit 980 ___________________________________________________________ Net benefit 4,830 Net benefit 0 Net reduction $4,830 Income after taxes $78,400 $73,570 ___________________________________________________________ _______________________________ [1]1 OAS payments are expected to be about $4,760 in 1996. Based on the inflation assumptions underlying the Fiscal Plan, they are projected to increase to $5,160 in 2001. ANNEX PROJECTED LEVELS OF THE SENIORS BENEFIT IN 2001 For those who have not reached age 60 by December 31, 1995, this table shows projected benefit levels under the Seniors Benefit in 2001. To determine your projected benefit, simply find the benefit level from column 2 (single seniors) or column 3 (couples) that corresponds to the income level that is closest to your anticipated income in 2001 from all sources other than OAS/GIS. Table 1 Projected levels of the Seniors Benefit in 2001 ___________________________________________________________ Tax-free Tax-free Seniors Benefit Seniors Benefit Income for single seniors for senior couples ___________________________________________________________ (dollars per year) 0 11,420 18,440 2,000 10,420 17,440 4,000 9,420 16,440 6,000 8,420 15,440 8,000 7,420 14,440 10,000 6,420 13,440 12,000 5,420 12,440 14,000 5,160 11,440 16,000 5,160 10,440 18,000 5,160 10,320 20,000 5,160 10,320 22,000 5,160 10,320 24,000 5,160 10,320 26,000 5,150 10,310 28,000 4,750 9,910 30,000 4,350 9,510 32,000 3,950 9,110 34,000 3,550 8,710 36,000 3,150 8,310 38,000 2,750 7,910 40,000 2,350 7,510 42,000 1,950 7,110 44,000 1,550 6,710 46,000 1,150 6,310 48,000 750 5,910 50,000 350 5,510 52,000 0 5,110 54,000 0 4,710 56,000 0 4,310 58,000 0 3,910 60,000 0 3,510 62,000 0 3,110 64,000 0 2,710 66,000 0 2,310 68,000 0 1,910 70,000 0 1,510 72,000 0 1,110 74,000 0 710 76,000 0 310 78,000 and above 0 0 ___________________________________________________________ Structure of the Seniors Benefit. The maximum benefit is $11,420 ($18,440 for a couple), $120 more than the projected maximum value of OAS/GIS in 2001. The benefit is reduced by 50 cents for each dollar of income until it reaches $5,160 per senior which is equal to the level of current OAS payments adjusted for projected inflation to the year 2001. Beginning at an income level of $25,921, the benefit is reduced by 20 cents for each dollar of additional income. PROJECTED BENEFITS FOR THOSE AGE 60 AND OVER For those who have reached age 60 by December 31, 1995, the following tables - for singles, one-income couples and two-income couples - provide the Seniors Benefit and the after-tax value of OAS in 2001. To determine your expected benefit, simply read across from the income level that is closest to your anticipated income in 2001 from all sources other than OAS/GIS. The tables show the most advantageous benefit - the new Seniors Benefit or the after-tax value of OAS. Note: The estimate of the after-tax value of OAS is based on a typical senior in an average province. Precise values will vary by province of residence, source of income, and in the case of two-income couples, the distribution of income between the spouses. Making the choice: The actual choice between the Seniors Benefit and OAS will need to be made only when the Seniors Benefit is about to be introduced in 2001, not now. In the months before the new benefit is implemented, the government will provide benefit information to all seniors, based on their own situations, to assist them in making the best choice. Table 2A Projected benefits for single seniors in 2001 ___________________________________________________________ Tax-free Seniors Net benefit Income Benefit under OAS/GIS ___________________________________________________________ (dollars per year) 0 11,420 2,000 10,420 4,000 9,420 6,000 8,420 8,000 7,420 10,000 6,420 12,000 5,420 14,000 5,160 16,000 5,160 18,000 5,160 20,000 5,160 22,000 5,160 24,000 5,160 26,000 5,150 28,000 4,750 30,000 4,350 32,000 3,950 34,000 3,550 36,000 3,150 38,000 3,000 40,000 3,000 42,000 3,000 44,000 3,000 46,000 3,000 48,000 3,000 50,000 2,830 52,000 2,660 54,000 2,480 56,000 2,270 58,000 2,010 60,000 1,780 62,000 1,590 64,000 1,440 66,000 1,280 68,000 1,130 70,000 970 72,000 810 74,000 660 76,000 500 78,000 350 80,000 190 82,000 40 84,000 0 ___________________________________________________________ Table 2B Projected benefits for one-income[1] couples in 2001 ___________________________________________________________ Tax-free Couple’s Seniors Net benefit income Benefit under OAS/GIS ___________________________________________________________ (dollars per year) 0 18,440 2,000 17,440 4,000 16,440 6,000 15,440 8,000 14,440 10,000 13,440 12,000 12,440 14,000 11,440 16,000 10,440 18,000 10,320 20,000 10,320 22,000 10,320 24,000 10,320 26,000 10,310 28,000 9,910 30,000 9,510 32,000 9,110 34,000 8,710 36,000 8,310 38,000 7,910 40,000 7,510 42,000 7,110 44,000 6,900 46,000 6,900 48,000 6,900 50,000 6,730 52,000 6,550 54,000 6,380 56,000 6,170 58,000 5,910 60,000 5,680 62,000 5,500 64,000 5,310 66,000 5,140 68,000 4,980 70,000 4,830 72,000 4,670 74,000 4,520 76,000 4,360 78,000 4,200 80,000 4,050 82,000 3,890 84,000 3,860 86,000 and above 3,860 ___________________________________________________________ [1] Assumes that all the income of the couple is in the hands of one spouse. Table 2C Projected benefits for two-income[1] couples in 2001 ___________________________________________________________ Tax-free Couple’s Seniors Net benefit income Benefit under OAS/GIS ___________________________________________________________ (dollars per year) 0 18,440 2,000 17,440 4,000 16,440 6,000 15,440 8,000 14,440 10,000 13,440 12,000 12,440 14,000 11,440 16,000 10,440 18,000 10,320 20,000 10,320 22,000 10,320 24,000 10,320 26,000 10,310 28,000 9,910 30,000 9,510 32,000 9,110 34,000 8,710 36,000 8,310 38,000 7,910 40,000 7,510 42,000 7,390 44,000 7,210 46,000 7,040 48,000 6,860 50,000 6,750 52,000 6,750 54,000 6,750 56,000 6,750 58,000 6,750 60,000 6,750 62,000 6,700 64,000 6,580 66,000 6,460 68,000 6,350 70,000 6,230 72,000 6,120 74,000 6,000 76,000 6,000 78,000 6,000 80,000 6,000 82,000 5,900 84,000 5,800 86,000 5,690 88,000 5,590 90,000 5,480 92,000 5,370 Table 2C (cont’d) Projected benefits for two-income[1] couples in 2001 ___________________________________________________________ Tax-free Couple’s Seniors Net benefit income benefit under OAS/GIS ___________________________________________________________ (dollars per year) 94,000 5,220 96,000 5,070 98,000 4,910 100,000 4,780 102,000 4,670 104,000 4,560 106,000 4,470 108,000 4,380 110,000 4,280 112,000 4,190 114,000 4,100 116,000 4,000 118,000 3,910 120,000 3,820 ___________________________________________________________ [1] Assumes that the couple’s income is split 60/40 between the spouses. * Updated October 1997.