Why Benefits for Low-Income Seniors Shouldn’t Stand in the Way of CPP Expansion

Dean Connor, President and CEO of Sun Life Financial, received $7.7 million in compensation in 2014, double his payout from 4 years earlier, and enough to place him 50th on the list of top-paid CEOs in Canada.

So it took a certain amount of chutzpa for Mr. Connor to tell the similarly well-heeled audience of the Economic Club of Canada, as he did in November last year, that the 60% of employed Canadians earning under $50,000 a year don’t need, and shouldn’t get, an improvement in Canada Pension Plan benefits. According to Mr. Connor, low and modest income earners need all the take-home pay they can get, and in any case, they’re already saving enough for retirement.

While it may seem strange to hear this from a well-paid CEO, Dean Connor is not alone. Many critics and opponents of a major expansion of the CPP have argued that increased saving through the plan would be inefficient for lower and modest income workers, since higher CPP retirement benefits would be offset by lower Guaranteed Income Supplement (GIS) benefits.

Introduced in 1967, the GIS is a monthly income-tested retirement benefit intended for low-income seniors with little income other than Old Age Security benefits. Eligibility for GIS depends on income levels, but also marital status. There are two benefit rates for GIS, one for single pensioners (including never married, divorced, separated or widowed individuals), and a lower rate for pensioners with spouses or common-law partners.

For low-income seniors, income from other sources leads to offsetting reductions in GIS benefits through an income “clawback.” Because of this, some have argued that individuals that might qualify for GIS benefits should be excluded from any increase in CPP benefits. Asking low-income earners to save more through CPP, so the argument goes, will only lead to a reduction in GIS benefits in retirement. Any additional retirement benefit from higher CPP contributions will be reduced by the GIS clawback, making it inefficient to save more through the CPP but only gain a partial increase in total retirement income.

This is an important concern, and one that deserves serious attention. The GIS is a vital source of income for many seniors, especially women and low-income individuals. But there are significant weaknesses in the GIS itself that speak to the need to reform the GIS on its own terms, and with respect to its relationship to other “pillars” of the retirement income system.

Too many people are forced to depend on the low-income GIS

In January 2016, 1.86 million seniors received GIS, nearly a third of all seniors in Canada. Nearly 60% of these recipients were single seniors, the majority of whom were women. Something has gone badly wry with Canada’s retirement income system when one in three individuals over age 65 draw income from Canada’s income-tested benefit for seniors with little or no income other than OAS.

Employers take advantage of the GIS

GIS benefits are paid for out of general tax revenues. When employers terminate their workplace plan or offer nothing in the way of a pension to employees, they are counting on tax-financed GIS benefits to support their workers in retirement. Rather than contributing to employees’ retirement savings and helping their employees prepare for retirement, employers are counting on all Canadian taxpayers to pick up the bill when their employees enter retirement.

The majority of workers in Canada do not have access to a pension plan at work. For individuals with no workplace pension or retirement savings plan, roughly 11 million employed and self-employed Canadians, the CPP/QPP will be the only earnings-based pension they receive in retirement. But the CPP’s average monthly retirement benefit – $550 overall, and just $450 for women — is too low to live on in security and dignity. As a consequence, workers with no workplace pension income will rely on GIS when they retire.

If Canadians had a decent workplace pension plan during their working lives, they wouldn’t need to rely on GIS in retirement. But over 60% currently have no pension, and employers are unlikely to start expanding pension coverage anytime soon; quite the opposite, they are abandoning workplace pensions.

So enhancing the universal Canada Pension Plan is the only way in which employers can be compelled to continue sharing the responsibility for their employees’ wellbeing in retirement.

Higher income individuals take advantage of the GIS

Income from Tax-Free Saving Accounts (TFSAs) are not included in income used to calculate eligibility for GIS. This is an extraordinary gift to the financial industry that markets TFSAs, an advantage that pension plans do not enjoy.  But it is also a gift to higher income earners, who disproportionately take advantage of TFSAs.  These individuals comprise the small fraction that contribute the maximum to TFSAs that they and their family members own. By transferring investments to TFSAs and opening them for family members, higher income earners who would not otherwise qualify for GIS benefits can be eligible.  This is projected to increase the future cost of the GIS program, in some calculations by as much as 84%.

Family-sponsored immigrants will find it harder to get access to GIS

Currently, immigrants need to be in Canada for 10 years to be eligible for Old Age Security (OAS) and GIS. The restrictions apply to immigrants who arrive under the parents and grandparents program, in which the sponsor already in Canada agrees to bear financial responsibility for his or her relatives.

In March 2014, the federal government extended the period of ineligibility for GIS benefits for sponsored immigrants to the entire 20-year sponsorship period. Applications for OAS will still be allowed after 10 years, but 20 years will now have to elapse before an application for GIS can be made. Immigrant seniors are already at greater risk of low income than are Canadian-born seniors, and recently-arrived immigrant seniors are at greater risk than established immigrants. Denial of access to GIS after 10 years can therefore be expected to extend the duration in which immigrant seniors experience low income.

GIS benefits will lose value over time relative to the average wage and salary

OAS, GIS and Allowance benefit amounts are quarterly indexed only to Consumer Price Index (CPI), meaning that the value of OAS program benefits can be expected to decline over time relative to average wages, as nominal wages increase faster than prices (i.e., as real wages increase). GIS benefit levels should also decline relative to CPP average benefits, which reflect wage growth. Historically, the GIS benefit has been periodically increased, but in an ad-hoc manner. By itself, the impact of inflation indexation will tend to widen the gap between average employment earnings and CPP benefits on the one hand, and GIS benefits on the other. The Liberal government has promised to introduce a seniors’ price index to reflect the different consumption patterns of elderly Canadians. While the CPI may in certain periods slightly underestimate inflation experienced by seniors, moving to a seniors’ price index will not prevent the relative value of GIS benefits from tending to fall.

The GIS clawback has a severe negative impact on low-income seniors’ incomes, and not just because of CPP income

The GIS clawback imposes severe reductions in the incomes of low and modest-income seniors. The GIS clawback affects all income, not just CPP income. For instance, in certain circumstances, RRSP income can be effectively taxed at over 100% through corresponding reductions in GIS benefits, provincial GIS top-ups, social housing, home care, and other income-tested benefits. The GIS clawback is unfair and serves as a disincentive to save for retirement; it’s a problem that needs addressing in its own right.

Eligibility for the GIS is determined every year based on the previous year’s income. From the first dollar of monthly income, the maximum GIS benefit is reduced by 50 cents for every dollar of income from CPP, private pensions, Employment Insurance, rental income, and employment and self-employment income above $3,500. This reduction is in addition to any reduction to the GIS top-up, which is reduced by 25 cents for every dollar of income in excess of $2,000 for GIS single recipients and $4,000 of combined income for couples.

The impact of the GIS clawback on low-income seniors could be softened by reducing the 50% clawback rate, exempting a portion of all income (not just the first $3,500 of employment income), or some combination of the two. But the clawback is a larger and specific problem that needs addressing over and above its integration with CPP benefits.

Over time, the GIS top-up will become less and less effective for low-income seniors

In 2011, the federal government introduced a top-up to the GIS. Under the rules of the top-up, single seniors with less than $2,000 in annual income and $4,000 for GIS recipients that are married or in a common-law relationship receive the maximum amount. The maximum top-up benefit is then reduced by 25% for every dollar in income beyond the $2,000 and $4,000 reduction points, until the top-up reaches zero at annual incomes of $4,592 and $7,648 respectively.

But these reduction points are fixed rather than indexed to the rising cost of living, which means that more and more very low income seniors will see their GIS top-up reduced.

Slightly increasing the GIS is by itself unable to keep Canadian seniors out of poverty

The new Liberal government has committed to increasing GIS benefits for single seniors by 10% as a way of reducing old-age poverty. But initial projections suggest that this will have a limited impact on reducing seniors’ poverty, particularly relative to effect that increasing the GIS top-up would have. In any case, more than the availability of GIS benefits, it has been the increase in (female) lifetime earnings and the opportunity to save through workplace pension plans and the CPP has been instrumental in reducing old-age poverty in Canada. A universal improvement of CPP benefits will have an important role in further reducing old-age poverty in Canada.

Losing eligibility for GIS benefits means losing eligibility for provincial top-ups and municipal subsidies and low-income programs

In addition to federal benefits like the GIS, many provincial and municipal assistance programs support low-income seniors. These include provincial income supplements for seniors, subsidized housing, home care, municipal property tax deferrals, homeowner grants, medical supply subsidies, dental and eyeglass supports for low-income seniors, and the like. Eligibility for many of these city and provincial assistance programs are tied to GIS; if a senior is no longer eligible for GIS, these additional benefits are jeopardized. This acts as a further disincentive to save for retirement.

The cost of GIS, while manageable, is significant 

The federal government’s GIS expenditures amounted to $10.12 billion in 2014-15. Before the Conservative government’s planned increase in the age of eligibility from 65 to 67, GIS expenditures were projected to reach $40.2 billion in 2050, when 3.58 million seniors are expected to draw GIS. This projection takes into account the effect of the TFSA in raising the number of GIS recipients (and therefore expenditures). As a share of GDP, GIS expenditures will rise slightly to around 2030, before tailing off. But the cost of the program is significant and rising alongside the ageing of the Canadian population.

In Sum:

The Guaranteed Income Supplement is an important program that provides vital support to the neediest seniors in Canada. GIS benefits are meagre, but they do allow many working poor to retire equally or even slightly less poor. For modest income earners, GIS benefits may provide an essential component of total retirement incomes. Whether GIS benefits adequately provide financial security or dignity in retirement is another question, however.

Since its inception 50 years ago, the GIS benefit has evolved in ways that sometimes act at cross-purposes with the goals of overall pension reform. The many strengths and several weaknesses of the GIS benefit act in concert with the rest of Canada’s retirement income system. These strengths and weaknesses themselves deserve dedicated scrutiny and public debate. But the GIS program should not simply be imported into the pension reform discussion simply as a means of hindering improvement of the Canada Pension Plan or other parts of the system. To do so would be a disservice both to low-income seniors, but also the many modest and middle-income Canadians who stand to benefit from CPP enhancement.

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