Canada’s chief actuary has released a report that says the enhanced Canada Pension Plan could eventually “disqualify” 243,000 low-income seniors from receiving the Guaranteed Income Supplement (GIS). No doubt this makes for compelling media headlines but really, so what?
If your employer suddenly offered you a gold-plated inflation-indexed pension plan, you’d welcome it even if it meant you would no longer qualify for the GIS, which is a supplement to Old Age Security and goes to only the poorest third of OAS recipients after the qualifying age of 65.
GIS benefits are “means-tested” and tax-free, but single seniors who earn more than $17,688 a year won’t qualify for them. Currently, maximum CPP benefits taken at the normal retirement age of 65 max out at $13,110 per person, but the enhanced CPP would eventually raise this to $20,000, which is above the GIS threshold. Keep in mind that even as things stand, CPP benefits can be increased 42% by waiting till age 70 to start receipt of benefits.
But if an “enhanced” CPP that doesn’t kick fully in for decades helps low-income seniors get above the minimum GIS threshold, isn’t that a good thing? No competent financial advisor I know would counsel seniors or anyone else to manage their finances so they earn less than $20,000 a year. If you did qualify for GIS, they would rightly conclude that they hadn’t done their job correctly.
“Why do people have GIS? Because they don’t have enough discipline to save for retirement,” says Doug Dahmer, president of Burlington-based Emeritus Financial Strategies. The enhanced CPP is a “system that forces them to save and add extra income from employers” to their retirement nest egg “so they’ll be better off.”
Oakville-based wealth advisor Warren Baldwin of T. E. Wealth agrees, calling the senior actuary’s report a “bit of a tempest in a teapot” given that the impact on those eligible for GIS is an expected reduction in 2060 (which is when the enhanced CPP fully kicks in).
However, all this presumes the GIS will even still be around by then, Baldwin says. The tax system and income-protection programs have changed so much in the last half century that it could well be replaced by some other system. Second, Baldwin says, the CPP-contributing taxpayers who might be impacted by this possible GIS eligibility shrinkage are currently the 20-something millennials who probably haven’t given any thought to this issue at all. And third, that same generation may inherit a lot of cash from their baby boomer parents and relatives, which might wash them out of the GIS regardless.
True, as the rules currently stand, money invested in Tax Free Savings Accounts (TFSAs) will not in itself disqualify GIS recipients: that’s arguably one reason Ottawa introduced TFSAs: to encourage low-income workers to save without fear of losing such benefits (which makes me wonder why the Liberal government cut the previous $10,000 TFSA limit back to $5,500, if they’re so worried about low-income seniors).
RRSPs and Registered Retirement Income Funds (RRIFs), like employer pensions and the CPP (enhanced or not), all create taxable income that can soon put prospective GIS recipients past the minimum threshold to qualify. As would non-registered investment income, which is likely where inheritances would go once TFSA room is used up.
But again, that’s a nice problem to have. And from a self-respect point of view, isn’t it better to know that your enhanced CPP benefits are derived from working for a living, rather than sitting at home waiting for a government handout? Yes, this means slightly higher payroll taxes but it’s a form of forced savings that eventually come back to you.
Doug Runchey, who worked for three decades in the federal government administering various income security programs and now runs DR Pension Consulting from Vancouver Island, agrees someone eligible for GIS won’t benefit fully from the enhanced CPP changes once they kick in, but “I wouldn’t really agree that it hurts them. Their GIS will only be reduced by approximately 50% of the increase in their CPP benefit, so they’re still better off than if their CPP wasn’t enhanced.”
Furthermore, Runchey says, “if they actually exceed the threshold where they won’t receive any GIS at all, they get to keep every dollar of increase above that amount.” Matthew Ardrey, wealth advisor with TriDelta Financial agrees, adding, “If someone has more money in their hands after the enhancement, why the concern? Even though the taxpayer is taking home more net, they are effectively being taxed at 50% by the CPP enhancement, as GIS is clawed back $1 for every $2 of income.”
Retired actuary Malcolm Hamilton goes further and notes, “The expanded CPP was always going to hurt low-income Canadians, as was the proposed Ontario Retirement Pension Plan (ORPP) that it replaced. Our governments decided to proceed, knowing exactly what they were doing and precisely who would be hurt. Now some of those who supported CPP expansion are whining about the unavoidable consequences of the policy they advocated. It’s like watching reruns of the gong show.”
It’s a crazy system that incents potentially productive citizens to seek tax-free handouts from those who do work, save and pay taxes rather than join the system themselves and taking some responsibility for their future financial well-being. This warped worldview even extends to some couples considering divorce just to maximize their GIS and to afford long-term care costs.
Let’s put the GIS program into perspective. It’s a safety net for our least fortunate seniors who, for whatever reason, were unable to put aside money for retirement and are now struggling to meet the minimum expenses of rent, food, and utilities. This is often exacerbated by grey divorce or bereavement, which can happen to any of us. As a society, we need to establish this safety net. An enhanced CPP is no threat to this but rather provides a needed additional security cushion, as do employer pensions and personal savings.
A financial plan that’s based on eschewing all these other future income sources except the GIS is no plan at all. As for the 243,000, they should view being disqualified from GIS as good news.
MORE ABOUT PENSION:
- What to expect when applying for CPP
- Paying into CPP when you work past your 60s
- How business owners should time CPP and OAS
- New CPP, same concerns it will run out of money
- What you need to know about CPP reform
- Most Canadians can’t afford to save more for retirement
- How much should I have in my RRSP?
- When it pays to take CPP early