OAS savings could turn out to be costly

By Michael Wolfson

The rate of affected seniors living in poverty would have more than doubled, and the provinces would still be paying

A version of this commentary appeared in The Toronto Star, iPolitics.ca, and the Trail Daily Times

The federal government has recently been floating one sentence options for cutting the Old Age Security (OAS) program — causing a media flurry, and heated public debate.  The only details provided to date indicate that changes would focus on those aged 65 and 66, and that it would not be implemented until sometime after 2020.

But what would have happened if the proposed government changes to OAS had been fully implemented in 2011?  That is, what if OAS would not have been paid at all to 65 and 66 year olds last year, assuming the Guaranteed Income Supplement (GIS) (the income tested benefit that is part of OAS legislation) remained unchanged?

This is an important question to ask, since the primary reason provided by the government for cuts to OAS is to make the program more fiscally sustainable — to save money, in other words.

But OAS is only a part of Canada’s retirement income system that includes other major programs and tax provisions, so cutting OAS would cause ripples throughout the system.  Creating a hypothetical scenario helps to see how far the ripples from the cuts might reach.

Since the federal government is short on details, I have used Statistics Canada’s Social Policy Simulation Database and Model, and my own assumptions to create the calculations and interpretation of the results.  If OAS had been denied to all 65 and 66 year olds in 2011, the overall costs of OAS would have dropped by about $4 billion.  But because OAS is included in taxable income, there would also have been a drop of roughly $50 million in federal income taxes and a $300 million decline in provincial income taxes.

Further, because these seniors (the 65 and 66 year olds) would have lower disposable incomes and hence less money to spend, there would be over a $100 million drop in federal GST and almost a $200 million drop in provincial sales and other commodity taxes and health premiums.

The bottom line: the net fiscal impact of such a cut to OAS, in 2011 terms, would be a fiscal savings for the federal government of about $3.5 billion, but combined with a $500 million loss in tax revenue for the provinces.

Further, the almost 700,000 seniors age 65 and 66 would also have had reduced incomes unless they compensated — for example, by working more, or drawing down more of their savings, or moving in with relatives.  If they didn’t, the number of 65 and 66 year old Canadians falling below Statistics Canada’s after-tax Low Income Measure (LIM) would have more than doubled from about 50,000 to almost 120,000 (with a further 15,000 in their sixties but not exactly age 65 or 66).

Such an increase in low income rates — most analysts refer to them as “poverty” rates — would likely be offset, at least in part, as many of these seniors would go onto provincial social assistance programs.  Federal cuts in OAS would be shifting costs to the provinces, in other words.

To avoid hurting the poor, the government could offset the cut in OAS for those with lower incomes by increasing GIS benefits by a corresponding amount.

But this change would dramatically reduce the fiscal savings for the federal government to about $500 million, taking into account changes in lost federal income tax and GST revenues.  The provinces would still lose about $350 million because non-taxable GIS benefits would be substituted for taxable OAS benefits.

So what is the federal government going to do?

Will the cut in OAS save billions in federal spending, while shifting hundreds of millions in revenue losses to the provinces, and more than doubling the poverty rate among affected seniors?  That’s what the 2011 hypothetical scenario indicates would happen.

Or will the cut — with a possible modified GIS — protect the most vulnerable seniors, but save far less for the federal government, and still hit the provinces with large revenue losses?

This would mean that the net effect on the fiscal balances of both levels of government combined — what ultimately matters to taxpayers and the economy — would be essentially nil.

On March 29th, the federal government will table the budget and we will see if and how crucial details of the OAS cuts will be addressed.  Let’s hope the government does not chose to reverse one of Canada’s greatest social policy successes of the last half century and increase poverty rates among Canada’s seniors.

Let’s also hope they don’t choose to shift hundreds of millions of fiscal burdens to the provinces in the name of improving their own fiscal situation.  And let’s hope they will not approach public policy with a narrow focus that pays no attention to the realities of a shared jurisdiction and the complexity of programs forming Canada’s retirement income system.

Michael Wolfson is an expert advisor with EvidenceNetwork.ca, and Canada Research Chair in Population Health Modeling/Populomics at the University of Ottawa.  He is a former Assistant Chief Statistician at Statistics Canada, and spent several periods during his career in the Federal Public Service developing and advising on pension policy. 

March 2012

This Commentary is from Commentaries, Aging Population & Its Potential Impact.

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