Budget delays OAS eligibility to 67

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The federal government hiked the eligibility age for Old Age Security (OAS) to 67 from 65 reflecting the reality that Canadians are living longer and healthier lives, and may prefer to keep working.

However, the changes won’t begin taking effect for 11 years. Federal Finance Minister Jim Flaherty announced the adjustments in today’s federal budget, which also includes spending cuts totalling more than $5 billion.

The eligibility age for OAS will be gradually raised starting in 2023, with full implementation by 2029. The changes won’t affect people who are 54 or older, as of March 31, 2012. Those born on or after February 1, 1962 will have an eligibility age of 67. Those born between April 1, 1958 and January 31, 1962 will be part of the phase-in period, and will have an eligibility age between 65 and 67.

“If you’re an older person, you might be a bit concerned,” says Doug Carroll, vice president, tax and estate planning, Invesco Trimark, who was in the budget lockup with Advisor.ca. “OAS is a fairly small component of most people’s financial plans, if they are also involved in private savings. It’s a discussion point but I don’t see it affecting calculations in a really significant way. “

The budget also includes a new deferral option for OAS. As of next year, Canadians can voluntarily defer their OAS pension for up to five years, allowing for an actuarially-adjusted higher payment in later years.

For example, someone turning 65 in 2013 can defer OAS until they reach age 70. This will give them an annual payment of $8,814 instead of $6,481.

“You can defer your OAS in the same way you can now defer your CPP,” Carroll notes.

Ottawa is also introducing a “proactive enrolment regime” for OAS that will eliminate the need for many seniors to apply. The OAS is the single largest federal government program, costing Ottawa $38 billion in 2011 and projected to increase to $108 billion by 2030.

There are no changes to CPP contribution rates and Ottawa is moving forward on the implementation of Pooled Registered Pension Plans.

The budget includes minor tweaks to retirement compensation arrangements (RCAs), with Ottawa noting the CRA has identified some arrangements that seek to take advantage of various features of RCA rules to obtain tax benefits. The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arms’ length transactions. The rules are based on existing regulations for TFSAs and RRSPs.

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“The rules being brought forward appear to be directed at the closing of tax loopholes that the government has perceived as a problem,” says Carroll.

Other changes

Following a review, the government also is adjusting rules concerning Registered Disability Savings Plans (RDSP), making them more flexible. For instance, the measures provide for an increase in the annual maximum withdrawal limit. Further, parents with RESPs for children with disabilities will be permitted to transfer investment income earned in an RESP to an RDSP, tax free.

RDSPs can only be established for those eligible for the Disability Tax Credit. Currently, when a recipient loses eligibility for the DTC, the RDSP must be shut down the following year. The budget proposes to extend the period for which an RDSP may remain open after the beneficiary becomes DTC-ineligible.

An ongoing review of program spending has led to a reduction of $5.2 billion, about 7% of the total, an amount Ottawa says is “modest and measured.” Most government departments will feel the pinch; $112 million will be cut from the Health portfolio, $52 million from Heritage and $180 million from international development assistance programs, including CIDA.

The reductions are expected to lead to elimination of 12,000 government jobs over a three-year period, mostly in and around Ottawa. Total federal employment will be reduced by about 19,200 jobs, or 4.8% of the current workforce. Ottawa says that’s about one-third of the job cuts introduced following a similar review in the 1990s, when 50,000 jobs were cut.

“We will implement moderate restraint in government spending,” Flaherty said in his budget speech. “The vast majority of the savings will come from eliminating waste in the internal operations of government, making it leaner and more efficient.”

Despite the cuts, Ottawa is also introducing a number of new spending initiatives, including more than $1 billion on science and technology, $500 million to grow start-ups and $275 million on First Nations education.

The deficit will be reduced, with $12 billion in cuts expected over the next two fiscal years. The deficit is projected to decline to $1.3 billion by 2014-15 from $24.9 billion in 2011-12.

Changes to employment insurance include limiting EI rate increases to no more than five cents per year until the overall EI account is balanced. Ottawa proposes to spend about $21 million to help unemployed workers find jobs more quickly and $74 million on a pilot project that will reduce the clawback rate applied to workers who earn money while on EI. An additional $387 million has been earmarked to align the calculation of EI benefits with local labour market conditions.

Finally, the federal government is getting rid of the penny. As of this fall, the Royal Canadian Mint will no longer produce the coins, although they still can be used in transactions indefinitely. If no pennies are available, the government suggests rounding the price to the nearest five cents.

“Pennies take up too much space on our dressers at home,” said Flaherty. “It costs taxpayers a penny-and-a-half every time we make one. We will, therefore, stop making them.”

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Doug Watt is an Ottawa-based writer and editor.

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