The 2012 budget is proposing changes to the OAS system to ensure that it continues to be sustainable. The OAS program is financed from the government’s general revenues and provides a monthly pension to nearly all Canadians age 65 years of age or over. For 2012, the maximum annual OAS pension is $6,481 or $540 per month. The 2012 federal budget proposes to change the age of eligibility for OAS benefits, to be phased in gradually, starting in 2023. As well, the budget introduced the option to defer the OAS pension and receive an actuarially adjusted pension, beginning July 1, 2013.
OAS was introduced in 1970, when life expectancy was 69 years of age for men and 76 for women – today, it’s 79 for men and 83 for women. The government therefore estimates that the cost of the OAS program will grow from $38 billion in 2011 to $108 billion by 2030. In addition, in the 1970s, there were seven workers for each person over the age of 65. Today, there are four workers per senior, and in 20 years, based on estimates of Canada’s declining birth rate the government projects that there will be only two workers for every 65-year old.
OAS Age of Eligibility
It’s proposed that the age of eligibility for OAS and the Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67, starting in April 2023, with full implementation by January 2029.
This 11-year notification period, followed by a six-year phase-in period, will provide individuals with significant advance notification to plan their retirement and make adjustments to their savings plans. In other words, the proposed legislative change to the age of OAS/GIS eligibility won’t affect anyone born on or before March 31, 1958. If you were born on or after February 1, 1962, your OAS/GIS eligibility age will be 67. Canadians born between April 1, 1958 and January 31, 1962 will have an age of eligibility between 65 and 67, as indicated by Chart 1.
Option to Defer the OAS Pension
The budget papers state that Canadians are living longer and may prefer to work longer and as a result, the government believes that the OAS program should reflect this new reality and provide the option for individuals to work longer, defer OAS and receive higher retirement benefits. As a result, beginning on July 1, 2013, the changes provide that you will be allowed to voluntarily defer taking your OAS pension, for up to five years, and receive a higher, actuarially adjusted, annual pension as a result. The adjusted pension will be calculated on an actuarially neutral basis, just like it is with CPP, which means that, on average, you could receive the same lifetime OAS pension whether you choose to take it at the earliest age of eligibility or defer it to a later year. The government provided an example of how this would work. Consider Michael who turns 65 in September 2013. Instead of taking OAS at age 65, he plans to work a year longer and defer taking his OAS until age 66. As a result, his annual pension would be $6,948 or $579 per month instead of $6,481 or $540 per month.
In a financial planning perspective, unless you are at the top tax bracket, and a really low bracket at retirement, you will most likely want to receive your payment from 65 anyway and be able to enjoy the money now or save it to let it grow to draw more later.
Proactive Enrolment for OAS and GIS Benefits
One of the problems with the OAS/GIS system is that you must actually apply to receive the benefits. Failure to apply means you could lose out on potential OAS payments since the government will only pay retroactive payments back to your 65th birthday up to a maximum of 11 months (plus the month of application).
This issue was highlighted in a recent Federal Court decision in which a taxpayer requested a formal review of Service Canada’s decision to deny him retroactive OAS beyond the 11 months. He claimed he had received “erroneous advice” regarding his entitlement to OAS benefits. He lost his appeal.
In the 2012 budget, the government announced that it would be putting in place a “proactive enrolment regime” that would eliminate the need for many seniors to apply for OAS/GIS. This will be done in a phased-in approach from 2013 to 2015.
We will be sure to update you when the proposed changes are enacted and will brief you on how these changes might impact your personal retirement plan at our next meeting.
Source: Government of Canada, Economic Action Plan 2012 & Jamie Golombeck summary.