A call for action on financial issues affecting women & seniors by Brian Mallard.

In an effort to assist you in with some of the issues in the upcoming election we have decided it might be helpful to examine some of the promises that affect the ability of Canadians to save for retirement, and their access to and availability of publicly funded pension programs like Old Age Security, Guaranteed Income Supplement and Canada Pension Plan. This is a non-partisan (hopefully) analysis that will just examine the proposals and their effects on individuals and on the finances of the country generally. We recognize that we are probably walking in a mine field but will do our best to provide you with the position and do so by avoiding any of the spin.

Change in the Eligibility to Old Age Security.

This campaign promise is a reaction to the budget proposal that the eligibility be changed from age 65 to age 67 for all individuals born after 1958. This change was passed but really comes into effect in 2023, 8 years from now. Current OAS provides a monthly payment of $564.87. For those individuals affected in 2023 it means a total reduction of $13,556.88 in today’s dollars. When we are formulating financial plans this reduction would not be difficult to accommodate. We would simply initiate a payment equal to the OAS entitlement from other funds to bridge this shortfall. Of course this assumes the individual has other funds available.

Two parties have pledged to roll this change back if elected. As a financial planner and a tax payer this does not impress me. First of all, the change comes into effect 8 years from now. If this change was going to affect your retirement plans you could simply save about $140 per month from now until retirement.  If you are younger than 57, the monthly savings required are less. Second there are better ways to address this issue.

The reason this was included in the last budget had to do with the desire of the government to get a handle on the cost of entitlement programs like OAS. This has been done in other ways in the past through a nasty tax nicknamed “ClawBack”. It does not affect everyone but those that are affected employ some pretty creative ways to avoid it.

I believe a more creative way to curb OAS costs would be to put a type of income test into the formula. If an individual is receiving T4 employment income in excess of the OAS there is no payment from OAS. This is sort of like ClawBack but with a twist that would curb payments to individuals who are not retired. This is a far more effective measure that would cause less pain individually and politically.

Another change that would not affect the cost of entitlement would be the option for an individual to take a reduced payment with provision that a surviving spouse would receive the reduced payment as a result of the individual’s death. This provision would primarily benefit elderly women who are among the poorest retirees.

Voluntary Contributions to Canada Pension Plan (CPP)

CPP is recognized as one of the best funded public pensions. Two of the reasons for this have to do with investment management costs and non-traditional investment diversification. These two advantages among a host of others have resulted in a compounded net rate of return over the past 10 years of 7.6%. This very enviable compared to the group average of 4.57%.  So, this is a great idea right? Well not so much. The problem here is that the administrative costs are not factored into the CPP Investment Board’s returns. Further, the assets of the fund are pooled not individually allocated. If the funds were divided into separate accounts with each account administered separately costs would drive the rate of return down near that 4.57%. In my world there are significant competitive pressures constantly keeping costs to a minimum. I do not know of a single government administered program that has any incentive to keep costs to a minimum. When all the factors are considered, this is a non-starter.

In line with my suggested improvement to OAS, I believe a joint and survivor option would significantly improve the pension situation primarily for elderly women.

Expansion and More Funding for the Guaranteed Income Supplement.

The GIS is an important benefit for low income retirees. About 1.4 million Canadians are eligible and receive benefits. The GIS is payable to individuals but it is based on the amount of income a couple receives. The amount of GIS reduces as the amount of total income increases. A  Canadian couple who are both receiving only OAS and the average CPP pension of $7,200 and have no other source of income will receive a GIS supplement of $170.83 per month.  This brings their total monthly income to $2671.40. They would have no tax to pay so this is their total spendable monthly income. It’s not a lot of money.

However, I think the question that needs to be answered is how does it compare to what they were receiving when they were working? In order to qualify for a CPP pension of $600 per month an individual would have to be earning a gross income of 66% of the average industrial wage (approximately $52,000), which is about $34,320. After income tax, CPP contributions and EI premiums the net is $27,381.50 each for a combined annual total of $54,763. Their income after retirement is about 60% of their pre-retirement spendable income.

I think most Canadians would agree that this is too little income in retirement. However to get them to 70% would require the OAS/GIS payment to increase by more than $500 per month. The estimated cost for this increase would be about $28 billion dollars annually. The current amount spent on OAS/GIS is about $41 billion. The $700 million proposed by two of the political parties would provide about a 2.5% increase if applied equally to every recipient. I am sure a modest increase is welcome but it’s inadequate. I am not sure what the answer is for current retirees.

I can tell you that the situation for a surviving spouse is even worse. The meager allowance paid to a couple drops by more than 50%. This could easily be avoided if the deceased spouse’s CPP and OAS/GIS payments were reduced by 4% to provide a benefit to a surviving spouse of 50% of the total of CPP and OAS/GIS.

So maybe a political party that is trying to get seniors to vote for them should take the $700 million annual amount that they want to use to provide a 2.5% increase and exchange it for a one-time cost of $1.8 billion to provide a 50% joint and survivor benefit to all couples receiving only CPP and OAS/GIS. This does not do anything to address the inadequacy that exists today but it does a whole lot to address the financial catastrophe that comes when a spouse dies.

In summary, there are more than 1.3 million women in Canada who have lost their spouse as opposed to 350 million men. In addition to the emotional trauma caused by the loss of a spouse they have all suffered significant financial stress due to the failure of provincial and federal governments to address this issue by making an opportunity available to provide a continuation of program benefits to surviving spouses through a joint and survivor option. Every married person over age 55 should ask every political candidate in this election where they stand regarding this. Failure to provide this option puts some of our most vulnerable retirees, particularly elderly women, at significant financial risk.