Is There Any Solution to the Old Age Security Problem?

According to the latest Treasury Board estimates, Old Age Security (OAS) payments will cost Canadians $67.8 billion dollars in the 2026-27 fiscal year. Guaranteed Income Supplement payments (for eligible Canadians 65 years and older) will add another $20.3 billion. Between them, those will make up more than 17 percent of the total federal budget.

Now, OAS is a critical function of government that no one is seriously considering eliminating. But that doesn’t mean its current structure is ideal or that there might not be ways to significantly reduce its drain on government finances.

The goal of the OAS program is to provide support for low-income seniors with no other source of funds. To ensure that only genuinely deserving Canadians receive it, OAS eligibility is income tested: if you earn more than a basic amount during the year, your OAS payments will be clawed back.

The problem is that program eligibility isn’t means tested. So a senior in Toronto who owns a mortgage-free two million dollar house and has another couple of million dollars in unrealized investments could, under some circumstances, receive the maximum OAS payment. While another senior living in a basement rental and surviving month-to-month from CPP payments and RIF withdrawals could - because CPP and RIF income are both taxable and trigger claw backs - see half of his OAS payments cut.

That’s obviously not fair. But there’s not a lot that any government could do about it: reliably testing for means would be unjustifiably complicated and invasive.

However it might be possible to play around with OAS recovery thresholds to exclude a higher number of seniors whose income isn’t desperately low.

Current rules allow any senior whose net income is below $95,323 to keep the full payment (around $8,917 annually for those 65-74, and $9,800 for those older than 75). Any income above $95,323 will reduce OAS payments by 15 percent until they fall to zero. That’ll happen at around $152,062 for those under 75 and $157,923 for those who are older.

Reducing all thresholds by $20,000 - so that only those earning less than $75,323 would earn the maximum amount - could save the system around two billion dollars a year. And leaving the minimum income recovery threshold at $95,323 but dropping the maximum thresholds to, say, $120,000 and $125,000, could save a billion or so.

That’s real money. Unfortunately, it’s nowhere near close to enough real money. There’s no way politicians of any party are going to risk annoying the high-election-turnout seniors demographic. So, for political reasons, that’s a non-starter.

However, there might be another approach. Imagine simplifying the tax system¹ by reducing income tax rates, but maintaining overall revenue by removing some deductions. This would increase the amount of money many seniors get to keep - but also reduce marginal eligibility for OAS and GIS. If the changes were properly calibrated, they might not trigger any net losses for seniors.

Over time, the reform could additionally prompt more Canadians to choose to remain in the workforce for longer and build stronger retirement savings for themselves (not to mention pay more income tax in the process). In theory, this would happen because getting to keep more of your employment income makes work more meaningful and satisfying.

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1. Something that’s been an urgent need for decades in any case.