One of the

great public policy challenges

we face as a nation is the concept of intergenerational fairness. The problem is exacerbated by demographic realities. Baby boomers and those older still make up a large portion of the population and are a powerful voting bloc not only because of their sheer numbers, but also because they tend to vote more predictably than other generations. Accordingly, politicians might feel inclined to pander to this group. Good public policy may be sacrificed in the name of shrewd retail politics.

One of the least understood and least appreciated risks in

retirement planning

is longevity risk. These were seldom problems a half century ago when the retirement age for men was about 65 or 66 and for women was about 63. People died, on average, at around age 72 (69 for men; 76 for women). Life in retirement was often short.

Today, the average retirement age is still around 65, but the average age of death is about ten years later than in 1975 (about 79 for men and 84 for women). Planning for retirement was much easier when people had the good sense to die at a relatively young age. As such, the risk of outliving your money is a very 21st-century problem.

General need for most people is a reasonable basis for maintaining the status quo. People live longer, but not everyone needs government support. The long-term sustainability of our social programs can and should be called into question, at least in terms of fairness. It may be time to re-visit the concept of means testing.

Let’s look at the

Old Age Security

(OAS) program in Canada as a case study. The OAS program is primarily funded through general tax revenues, so unlike pension plans that are funded by specific contributions from employees and employers, it is paid for out of the government’s general revenues — the taxes collected by the federal government. The good news is that the format helps keep the program flexible and sustainable, as it doesn’t depend on, for instance, market performance or a fixed number of employees. This is especially important as the population ages. The bad news is that it costs more and more as time goes on, for the same reason.

In 2012, there was a major change proposed by then-finance minister Jim Flaherty which would have gradually

increased the age of eligibility for OAS

from 65 to 67. The proposed change was intended to help manage the long-term sustainability of the program. Then came the 2015 federal election. Under Justin Trudeau’s government, several notable changes were made to the OAS system. Specifically, they reversed the Flaherty plan and increased the

Guaranteed Income Supplement

(GIS) for low-income seniors, helping lift many out of poverty. One step back; one step forward.

In 2022, the government tinkered further and introduced a 10 per cent increase in OAS for seniors aged 75 and over and also provided a one-time $500 payment to those seniors. The current system is great (many would even say generous) for the elderly poor. Of course, not all old people are paupers.

One major issue Canada’s OAS system faces these days is that it provides benefits to higher-income seniors. The other concern is the rising cost of the program itself, which is expected to increase significantly in the coming decades. There are growing concerns the income thresholds for clawbacks are too high.

Why exactly do so many affluent seniors still receive substantial benefits? It may be they vote to sustain them. Since no one likes to see their entitlements diminished, it might be helpful to use numbers to delineate reasonableness.

Let’s use federal tax brackets

. They can serve as useful guideposts on where to draw the line. As of today, Canada’s federal income tax brackets are 14 per cent on income up to about $58,523, then 20.5 per cent on income up to about $117,045, 26 per cent up to around $181,440, 29 per cent up to about $258,482, and then 33 per cent on income above that.

At the same time, the OAS clawback kicks in when your net income exceeds about $93,454 – or about two-thirds of the way up the second bracket. For every dollar above that threshold, the OAS benefits are reduced by 15 cents. If your income reaches around $151,668 for those aged 65 to 74, or about $157,490 for those 75 and over, OAS can be fully clawed back. The number of seniors who encounter a full clawback has historically been very small (about one per cent to three per cent of all OAS recipients). Is that a proper threshold? Reasonable people can differ on where the line ought to be drawn for nebulous terminology such as “poor,” “middle class” and “wealthy.”

My view is that anyone in the lowest bracket should face no clawback whatsoever. I also don’t believe that anyone in the third bracket should get OAS at all (i.e. they should be fully clawed back). Remember that the clawback is based on individual income, not combined family income, so each person has their own threshold. There are strategies to reduce the impact, such as income splitting, buying flow-through shares or delaying your OAS, so it can be helpful to chat with a qualified financial advisor.

Using my thresholds, OAS would go from the current situation (having the clawback start at $93,454 and fully clawed back at $151,668 for those under 74) to having the clawback start at $57,375 with a full clawback in place once income reaches $114,750. My view is that our overly generous system is simply lavish for those who don’t really “need” the money. If you’re a senior with a six-digit income in retirement, you almost certainly don’t need to have your income supplemented further.

We’re saddling our children and grandchildren with too much debt as it is. Unfortunately, there aren’t enough of them voting to get politicians to represent their interests, so our OAS system, which is way past needing reform, remains largely unchanged.

John De Goey is a portfolio manager with Designed Securities Ltd., regulated by the Canadian Investment Regulatory Organization and a member of the Canadian Investor Protection Fund.

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