The Seniors Benefit

In its 1996 budget, the federal government introduced the new Seniors Benefit, an income-based program, similar to the Guaranteed Income Supplement, designed to supplement the income of poorer seniors.

If it goes into effect, as scheduled, on January 1, 2001, the Seniors Benefit will:

• eliminate Old Age Security (OAS)
• eliminate the seniors tax credit based on age ($3482.00)
• eliminate the retirement income tax credit ($1000.00)
• eliminate the Guaranteed Income Supplement (GIS)

In place of the existing programs, the Seniors Benefit will pay a maximum of $11,420 each year to single seniors (over 65) and a maximum of $18,440 to couples. However, the amount of money that retirees receive from the Seniors Benefit will be clawed back, based on income, using a highly complex formula. The amount of the clawback for couples is based on combined family income, although income tax is still based on individual income. When a senior’s individual retirement income exceeds $52,000, or a senior couple’s retirement income exceeds $78,000, they will lose all their Seniors Benefit.

Seniors now 65 or over will continue to receive OlAge Security and, if they qualify, the Guaranteed Income Supplement. However, they will lose both the seniors tax credit and the retirement income tax credit. Canadians who will turn 65 between now and the year 2001, can choose whether they want to receive the Seniors Benefit or the old OAS/GIS benefits. People who turn 65 after January 1, 2001 will have no choice. They will receive the Seniors Benefit.

Dramatic Impact

With the proposed Seniors Benefit, it appears that:

• current pensioners — regardless of whether they continue to receive OAS/GIS or the new Seniors Benefit could have $2,000 per year less in after-tax income in the year 2001 (because of the elimination of the age tax and retirement income tax credits).
• many pensioners will continue to live well below the poverty line. Statistics Canada has concluded that single Canadians and a married couple without children are in poverty if they have annual incomes under $16,874 and $21,092 respectively. If inflation over the next five years runs at an average of 2 per cent a year, these poverty level figures will reach $18,630 and $23,287 per annum respectively in the year 2001. The seniors benefit rates of $11,440 and $18,440 proposed for single seniors and senior couples will be well below the poverty line.
• single seniors — particularly women — will not be able to escape poverty even if they are fortunate enough to have other income of $12,000 a year. This is because the government will clawback some of their $11,440 in Seniors Benefit. Instead of having a total income of $23,440, the women will have only $17.440.
• the tax structure for the Seniors Benefit will also work to the disadvantage of poor and middle income seniors. With the clawbacks, they are losing income that is tax exempt, and continuing to pay full tax on any earned income. In the case of the single woman described above, she would qualify for $11,440 in tax-free income — if she had no other income. Because she has some other income, she loses $6,000 in the Seniors Benefit Plan and pays full tax on her other income of $12,000. In the real world, this is double taxation even if it doesn’t meet the fine points of the Department of Finance’s technical definition.
• even if people to receive the $10 more a month the government claims the Seniors Benefit will provide in 2001, the increase is virtually meaningless in real life terms. An extra $120 a year does next to nothing for impoverished pensioners, except provide a way for government to claim that “75 per cent of single seniors and elderly couples will receive the same or higher benefits. Nine out of 10 single elderly women will be better off.”
• with the new, reduced CPP rates, retirees who qualify for the full Seniors Benefit will actually receive $2 less a month ($24 less a year) in CPP and seniors’ payments than they receive now. Once again, this will affect a disproportionate number of elderly women.
• the Seniors Benefit, combined with other changes in the tax structure, removes any incentive to save for retirement, and has the potential to destroy the RRSP for young Canadians.

The government’s proposed package has serious flaws, particularly for pensioners who are below the poverty level. These problems must be addressed before the Seniors Benefit becomes law.

Alternatives

The Seniors Benefit appears to be a seriously flawed approach to changing public pensions. In its current form, it is likely to hurt low and middle income seniors, and discourage people from saving for their retirement. Combined with the changes being made to the Canada Pension Plan, it is likely to mean less money — not more money — for Canadian seniors. At the very least, the government’s Seniors Benefit should be modified to:

• provide significantly higher basic benefits (than the proposed $11,420 per single senior and $18,440 per senior couple) so low income seniors could be charged to the social security tax component of sales, corporate, and personal incomes taxes.
• restore the universality of public pensions and eliminate all clawbacks; if that is not possible, reconfigure the clawback rate structure so pensioners with low incomes have their benefits clawed back at a lower rate than pensioners with higher incomes.
• exempt poorer pensioners from any clawback or benefit tax — pensioners should have incomes of about $18,600 per single senior and $23,200 per senior couple (in 1996 dollars), which would bring them above the poverty line, before being subject to any taxes or clawbacks.
• use individual income — not combined family income — as the basis for determining the Seniors Benefit and any clawbacks.
• amend the Seniors Benefit to provide more incentives for Canadians to contribute to RRSPs and to remove features that discourage people from saving for their retirement.

If these changes were made, the full indexing of the exemption and benefit tax brackets would represent an improvement for pensioners.