Ottawa should preserve funding for OAS by eliminating outdated tax shelters for retirees

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Preserving Canada’s Old Age Security system is necessary to protect Canada’s proud legacy of investing in the financial security of retirees, which has reduced poverty among seniors below that of any other age group.

However, the sustainability of OAS is under threat as our population ages. OAS cost $69-billion in 2022. By 2027 it will cost $96-billion. This $27-billion increase is as large as the entire budget for Employment Insurance or the Canada Child Benefit. There’s no escaping that OAS costs are rising faster than all other policy measures in the federal budget.

Unfortunately, tax revenues are not keeping pace with the rising cost of OAS. This results in growing government deficits, for which Conservative Leader Pierre Poilievre blames inflation. It also pressures governments to limit other investments. To address these fiscal challenges, Ottawa should review outdated tax shelters for retirees that drain billions in revenue and could otherwise help cover rising OAS costs.

Mr. Poilievre finds it politically convenient to blame the Prime Minister for the $132-billion in deficits projected over the next five years. Reality, however, is more complicated.

Fully 84 per cent of those deficits can be accounted for by increased OAS spending, along with more money for medical care used by those over the age of 64. This reveals that contemporary deficits have less to do with policy decisions made by the current government than with inadequate revenue decisions made by previous ones.

Decades ago, politicians chose to ignore the predictable implications of the demographic bulge represented by the baby boom. During their working years, baby boomers paid taxes when there were seven working-age adults for every retiree. Now, in retirement, boomers expect the same or better supports when there are only three working-age Canadians to pay for every senior. There is little revenue left over from economic growth to invest in the kids and grandchildren of boomers, and we saddle their offspring with large unpaid bills.

Neither Mr. Poilievre nor Prime Minister Justin Trudeau is likely to reduce spending on OAS because it’s perceived to be too politically risky. However, some outdated tax expenditures could be safer politically to reallocate because they are less well-loved by the electorate. Two stand out: the Age and Pension Income credits that date back to 1987, when poverty rates among seniors still lingered near or above those of younger people. Together these credits drain $6.4-billion annually from the federal budget. Some, or all, of this money could be redeployed to help cover the growing cost of OAS.

At $5-billion annually, the Age Credit costs as much as Ottawa invested in $10-a-day child care this year. It shelters $8,000 of income from taxation for people over 64, delivering a maximum benefit of $1,200 for retirees with incomes below $40,000. The tax shelter only phases out entirely for retirees with incomes of more than $92,000.

That cutoff is about $25,000 more than the median income of all Canadians. Given that Statistics Canada reports many younger people now forgo having children because of the large gap between their housing costs and their incomes from full-time work, it is arbitrary to maintain an age-based tax shelter for those over the age of 64 when this demographic has the most wealth and least poverty of any age group in Canada.

Similarly, the Pension Income Credit costs Ottawa $1.4-billion annually. It enables any retiree to shelter $2,000 in pension income from taxation. This credit effectively privileges pension income over earnings from paid work, even though minimum-wage and other low-wage workers are more likely to experience poverty and housing insecurity than retirees.

The reality of politics being what it is, Mr. Poilievre will likely continue rallying his base by claiming that the Prime Minister is personally responsible for today’s large federal deficits. However, it would be more accurate if the opposition leader charged that the government is not moving fast enough to fix problems created decades ago.

To fix the fiscal problems imposed by OAS, we need to resist partisan rhetoric that draws attention away from the hard truth that past administrations did not plan revenue systems adequately to pay for the aging of the baby boomers. A federal task force on generational fairness would be helpful to remedy this challenge – one designed to protect healthy retirements for our aging loved ones while preserving a healthy childhood, home and planet for their kids and grandchildren.

Editor’s note: A previous version of this article made an inaccurate reference to federal budget spending cuts, which has been removed from this updated version.

Dr. Paul Kershaw is a policy professor at UBC and the founder of Generation Squeeze, Canada’s leading voice for generational fairness. You can follow Gen Squeeze on Twitter, Facebook, Instagram, and subscribe to Paul’s Hard Truths podcast.