means tests are taxes: Canadian edition

Canada provides persons from age 65 with a Guaranteed Income Supplement (GIS, currently C$871.86 a month for a single person), but claws it back at the steep rate of 50% from other income. There is no exempt amount, and some provinces add to this. The provincial claw back in Alberta, for example, is 18%, bringing the total rate of claw back to 68%.

Canada also provides residents from age 65 with an Old Age Pension (currently a maximum of $585 a month for a single person) that is reduced (clawed back) at the rate of 15% from taxable income in excess of $74,788 a year, so is equivalent to an increase in income tax of 15 percentage points for high income older persons until the full Old Age Pension is recovered. Receipt of the Old Age Pension does not count as income for a GIS.

Why do government policymakers in Canada implicitly tax the income of older persons at a higher rate than of younger persons with the same incomes? Perhaps they do not realize that means tests (clawbacks) are taxes. Simultaneously, though, the government has programmes in place to encourage workers to save for old age, to build up a retirement fund that is subjected to a high rate of taxation in old age. This puzzles me.

Canada also mandates contributions to a state pension, known as Canada Pension Plan. Canadian actuary Robert Brown, in a useful article, explains why increasing the contributions to (and benefits from) this plan harms contributors with low incomes, because it causes them to lose benefits that they would otherwise receive from the Guaranteed Income Supplement. He doesn’t mention this, but taxpayers with high incomes also lose benefits from expansion of the noncontributory Old Age Pension. No doubt he assumes (most likely correctly) that those with high incomes can look after themselves! Also, $585 a month is small change for someone with an income in excess of $6,200 a month.

In June 20, 2016 the federal and provincial Finance Ministers agreed to expand the Canada Pension Plan (CPP). …. [W]ho really benefits? Turns out, it’s not low or middle-income workers. ….

Here’s why.

The Canadian Guaranteed Income Supplement is a welfare payment meant to help only those attempting to live on very low income. Once a recipient earns some relatively modest income level, their GIS benefits are “clawed back.” This claw back is equivalent to a 50 per cent tax rate on earned income over the defined level and, because seven provinces have similar top-ups with similar claw backs, the effective tax rate can be as much as 100 per cent (or even higher, if there are other subsidies for housing, transport, etc.).

In other words, there is virtually no incentive for a low-income worker to save for retirement or to take paid employment, especially once one is retired and receiving the GIS. ….

When persistently low income workers retire, they will find that their GIS benefits (paid for out of general tax revenues) will now be clawed back. Most of them will receive nothing more in total benefits even though they have been forced to pay in full for the expanded CPP. ….

In short, the Canadian Retirement Income Security system is complex and full of important contradictions among and between component parts. One cannot just amend one part of the system without analyzing the impact on the total system. So far, the federal government seems not to have taken this into account.

Robert Brown, “Who will benefit from an expanded Canada Pension Plan Benefit? It’s not who you think“,, July 2017.

Who will benefit from an expanded Canada Pension Plan Benefit? It’s not who you think

A version of this commentary appeared as “Why few workers will benefit from an expanded CPP” in the Toronto Globe and Mail, 4 July 2017 (gated paywall).

Robert Brown resides in Victoria, British Columbia. He is an expert advisor with and past President of the Canadian Institute of Actuaries. In 2010, after 39 years on the faculty of the University of Waterloo (Ontario), he retired and became an Emeritus Professor of Actuarial Science.

Winnipeg-based is a network of more than 80 scholars who provide online material to support journalists covering health policy issues in Canada.

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