Should recent immigrants be eligible for Old Age Security?

Most Canadian seniors are guaranteed an income above the poverty line by Old Age Security, Guaranteed Income Supplement and the Canada Pension Plan. Seniors are less likely to be poor than children or adults under 65 - with one exception. Mike Veall has found that 71 percent of recent immigrants aged 66 and older have incomes below the poverty line. Although recent immigrants were just 2 percent of the 66 and over age group, they constituted 20 percent of those in poverty (2004 numbers based on tax return data).

Seniors who have just arrived in Canada are much more likely to live in poverty for two reasons: (1) they usually don't have much private pension income and (2) they aren't eligible for OAS and GIS. A person has to be in Canada for 10 years before he or she can start to collect Old Age Security and Guaranteed Income Supplement. Even then, a person is not entitled to receive full benefits until she has been in Canada for 40 years.

Mike Veall notes that removing the OAS/GIS residency requirement would do a great deal to lift recent arrivals out of poverty. In another article, Patrik Marier and Suzanne Skinner make the same point. Is it a good idea to make recent immigrants eligible for OAS and GIS? If the objective of OAS and GIS is relief of poverty, then surely the answer to this question must be yes.

The combination of OAS, GIS and CPP is a powerful anti-poverty tool. A recent Department of Finance document gives a snapshot that shows just how well Canada does compared to other countries when it comes to supporting the elderly:

 

There's a proven recipe for eliminating poverty: (1) use tax returns or another simple test to identify people without earnings or pension income (2) pay benefits that guarantee everyone an adequate income.  So why do we still have poverty in Canada? We don't chose to provide everyone with those income guarantees. 71 year olds, yes, 17 year olds, no.

Yet, as Stephen Gordon has written, Canada is now experiencing huge demographic changes - fewer working-age people, increasing numbers of over 65s, and an increasingly diverse senior population. The increased costs of OAS/GIS resulting from population aging will have to come from increased taxes, new debt, or cuts to other spending. In order to do any one of those things, a strong case would have to be made that OAS/GIS is a good use of funds.

The appeal of Guaranteed Income Supplement  - what makes it so different from provincial social assistance programs - is that it is an entitlement. There are no asset tests, no work requirements, no meetings with social workers, no 'man in the house' or other rules. OAS and GIS are (for those who are eligible) a right, which preserves the dignity of OAS and GIS recipients. To be considered, all you have to do is file an income tax return and apply.

But reporting a low income on your tax return  - the eligibility test used for GIS, and the basis of Mike Veall's numbers - is not the same as being poor. Recent immigrants are much less likely than other seniors to be living alone. Should seniors living in relatively comfortable arrangements with their children be considered poor? What about cash-poor seniors living in million dollar homes in Vancouver? Should eligibility for GIS involve some kind of check on an individual's living arrangements/assets to see if a person is actually living in poverty?

Moreover, the idea that someone, just because he or she has reached the age of 65, is entitled to special income guarantees, is hard to justify now that most provinces have no standard retirement age. The reason that 17 year olds are not entitled to an adequate guaranteed income is that they are expected to be in work, in school, or supported by their parents. If people over 65 are perfectly capable of working - as those in favour of ending mandatory retirement seem to imply - why should seniors automatically be eligible for special income support programs? Yes, many over 65 are disabled and unable to work - but so are many under 65. Why an age test?

There are other implications of thinking of Old Age Security and Guaranteed Income Supplement purely as poverty relief programs. Currently, any one who has been resident in Canada for 20 years can continue to receive Old Age Security even while living elsewhere. If we abandon the notion of OAS as a contributory program, does it make sense to pay OAS to people not living in Canada? Is there a non-invasive way to ensuring that people are, in fact, resident where they claim to be?

Compared to these other debates, whether or not recent immigrants are entitled to receive OAS and GIS might seem a minor issue. I think of it more as a canary in the coal mine - an early sign of the hard choices Canadians will have to make in the years ahead. 

Personally, I support Old Age Security. It is a potent force for empowering and protecting older women, as Shelley Phipps, Peter Burton and I have written about elsewhere (in a book, not on-line unfortunately). I am glad that my mother is entitled to receive it.

But I don't expect it to be there for me when I retire.

Comments

[Andrew F]

I would think eliminating the OAS would be political suicide. Unlike GIS, a very large number of Canadian seniors receive it, and seniors vote.

[Determinant]

I'm sorry Frances, I really deplore this sort of scare-mongering.

The OAS/GIS/CPP has been a great success in its purpose: reducing poverty among the retired elderly. Canada's mix between a purely tax-funded OAS and a fully-funded CPP is unique and works well.

The fact that CPP carries a good portion of the income load means OAS is sustainable. Insofar as it is almost guaranteed to be spent on current consumption, it goes right back into the economy. Very few other income programs can make such a claim.

If you compare the direct load the retirement system places on current tax revenues, I believe you will find that Canada has a similarly low ratio. This is because CPP is invested in non-government debt (unlike Social Security).

The true weakness in our retirement system is the third leg: private pensions and RRSP's. Pensions in particular are by far the weakest link and need to be reformed. RRSP's are simply not a direct substitute for them.

The 65 age trigger is something that does need to be examined. Life expectancies have risen dramatically. I was born in 1982 and at birth I had five great-grandparents living and all four of my grandparents. It's not uncommon among my generation to have great-grandparents. So yes, we do need to examine longer working lives or higher retirement ages.

Insofar as OAS has a residency requirement, that exists in order to ensure some sort of "contribution" to tax revenues. The government doesn't want dead losses. We have security-sharing agreements with countries like the UK and USA so that OAS is reciprocally linked to income programs in those countries. The real problem is that we don't have such agreements with places like India, China and Egypt. At its heart that's a development issue.

[Neil]

Question - why do we admit people to Canada who are over the normal retirement age, but have little saved to support themselves? It seems that the purpose of immigration is to grow the economy, then why admit people who will neither work, nor bring resources to support themselves?

My guess is a lot of the newcomer seniors are brought here by family, and thus are only below the poverty line when evaluated independently of the children who are supporting them. This doesn't seem unreasonable.

OAS isn't, and shouldn't be, a strictly anti poverty program. If we want a guaranteed minimum income, we should have such a thing for all. Anything geared specifically to seniors should have a contributory element, which is what the residency requirement does.

[Frances Woolley]

Determinant -

I agree with you that increasing the age trigger from 65 to 67 would make a lot of difference - that's my preferred policy option too. But such a change would have clearly identifiable winners and losers so would be politically very difficult.

The issues with private pensions can't be resolved without considering the interaction between OAS/GIS and savings. A recent study by Keith Horner shows that for a family with children earning under $40,000, there is absolutely no reason to save for retirement, as OAS, GIS and CPP are enough to guarantee a higher standard of living than the family enjoys at present. Richard Shillington and others have shown how for low- to moderate-income Canadians, RRSPs are a disastrous investment because of the tax-backs in GIS.

When people don't have adequate private savings, that means they rely more on OAS and GIS. With more claimants, something has to give - more taxes, more debt or cuts to OAS/GIS or other spending.

Neil, I agree with about the logic of a contributory program. But OAS is already income tested, so the logic of entitlement is already being compromised (as my father reminds me).

I don't think we'll see radical reform for the reasons Andrew F suggested. But I do think there will be tinkering around the edges with GIS and OAS for years - incremental changes in response to urgent problems like the poverty of recent immigrants - until eventually the program becomes unrecognizable and is reformed.

[Determinant]

I don't think we'll see reforms either, but mostly because I don't think we have a problem. Why are we fretting over a payment that tops out at $516.96 and phases out staring at an income of $66,000?

OAS costs $26 Billion/year. Large, but other items in the budget are larger. Shave a few billion off the interest costs on the national debt and you'll have ample room with respect to the size of the program.

The issues I have with private pensions aren't with the claw-backs per se, but with the reliability of pensions themselves. By pension, I mean an employer-sponsored Defined benefit pension. This is actually a life annuity whose size is determined by years of service. Life Annuities are life insurance products. It is madness to expect an employer to set itself up as a life insurer in addition to its primary business. But this is exactly what DB pensions require. Wonder why multi-employer pensions do better? Because they are closer to being true, independent annuity companies!

Unless a DC Pension or RRSP is annuitized, it cannot and will never be a true equal to a DB pension. It's nice to have as a top-up for spending flexibility and to make your golden years truly golden, but they aren't secure forms of income and should not be relied upon to provide direct DB pension replacement.

As for the problem of low-income RRSP's, that's why TFSA's were introduced. I saw a proposal paper circulating on the internet before their introduction where the concept was referred to as a TPSP: Tax-Prepaid Savings Plan. They won't be included in income for OAS calculations. Many other countries have this sort of arrangement in their tax systems, including the UK and US.

[Andrew F]

I agree that OAS doesn't make much sense. My preferred solution would be a gradual reduction in benefits and the maximum income at which new retirees receive any OAS, with the program coming to an end for new retirees in perhaps 25 years. I recognize that as a matter of fairness, people who will retire in the near future should receive some benefit for OAS because they contributed to it for their parents for many years. This money should be used to improve GIS, along with changes to CPP.

My issue with OAS is that it doesn't really make any sense. We're giving money to seniors who are wealthier than the average Canadian.

Frances: isn't $26 billion roughly our national debt service costs?

[Frances Woolley]

Andrew F, I couldn't find federal figures, just consolidated ones, but that number sounds about right:

http://www.statcan.gc.ca/daily-quotidien/090616/t090616a1-eng.htm

Neil's argument is that OAS is contributory so it doesn't matter that we're giving money to seniors who are wealthier than average. I would like to live in Neil's world, but I think lots of people think the way you do.

Determinant, it's the logic of large programs. $516 per month is totally manageable when a country has relatively few seniors; when it has a lot, it's not. Look at the graph above. Japan and all those European countries can't afford to have the low poverty rate for seniors that we do because they're so much further along in terms of population aging.

Introducing TFSAs was one of the best things that this government has done. I'm just waiting to see how attracted people will be to them - RRSPs have this illusory lure of the up front tax deduction, and people get bad investment advice, so contribute to RRSPs even when it's a financial disaster.

[Determinant]

I don't see that in the graph, Frances.

Look who's ahead of Japan in the table: The United States and Australia. And right down there at the very left-hand end is New Zealand. France and Germany are next to us and still in the A-league.

The United States' population is a shade younger than ours. Australia, New Zealand and Canada are all comparable. There is poor correlation between age structure and senior poverty.

These results better reflect the existing government payment structure to look after seniors.

The US likely does so poorly because high and extremely variable health care costs take priority over retirement savings during earning years.

I'd really like to know what the difference between Australia and New Zealand is.

[Frances Woolley]

Determinant - as you've said, payment structure matters, but I don't know if you know just how important it is. A small change in benefits can have a huge impact on the % of seniors in poverty - if OAS+GIS is $100 less than the poverty threshold, lots of seniors will be in poverty, if it's $100 more, only those ineligible for OAS+GIS, e.g. recent immigrants, will be. That may explain the Australia/NZ difference.

What would be interesting is to compare relative poverty rates for seniors and non-seniors - there might be more of an age structure effect there. The US has high poverty rates for non-seniors also so relatively seniors do o.k.

[Jason P]

If the policy question is strictly limited to reducing poverty among seniors, then yes OAS/GIS may well be the right policy tool. I do wonder however what Canadian taxpayers owe to people who worked and contributed elsewhere for most of their productive lives. How does allowing people late in their productive careers benefit Canada? To an earlier point made, maybe this is not really an issue as recent senior immigrants are being supported by kids who sponsored them. So income is not really a good indicator of well-being for these people.