CPP and OAS

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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Norbert Schlenker
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Re: CPP and OAS

Post by Norbert Schlenker »

The end result of the Chief Actuary's analysis is summarized in Table 14 on page 28 of the link provided. That's almost ten years ago and longevity has further increased since then so further adjustment is probably in order, but the Chief Actuary now has standing instructions to update the analysis every three years.

If you look only at the age 60 and 70 total adjustments suggested by the analysis (65% at age 60, 154% at age 70), it's clear that the recent adjustment is close to perfect for early retirement and way wrong for late. A 0.6%/month discount for early retirees calculates out to 64%, which is certainly close enough to what was determined to be fair. The 0.7%/month premium for late retirees, though, should be closer to 0.9%. It would be interesting to know why they didn't come closer for retirees over 65. If there's a pot simmering on the back burner that will raise normal CPP retirement age above 65, a la Social Security in the US, the simple way to ease into that is a financial incentive that delays people starting their pensions. As it is, they're incenting everyone to wait no later than age 65.
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Re: CPP and OAS

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Norbert Schlenker wrote:If there's a pot simmering on the back burner that will raise normal CPP retirement age above 65, a la Social Security in the US, the simple way to ease into that is a financial incentive that delays people starting their pensions. As it is, they're incenting everyone to wait no later than age 65.
But CPP is a small part of the retirement monies. My gf's pension has a reduction or increase of .33% starting at 60 so it seems to make actuarial sense for her to retire at 55 with a 20% reduction and wait for OAS/GIS at 65. Maybe that's where TFSA's will be useful.

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Re: CPP and OAS

Post by zinfit »

I don't have a problem with increasing the age eligibility over time. I do believe that the clawback threshold should be lowered.Its seems absurd that a couple with a combined income of 135k[67 each] would not be looking at the clawback. A 50k per person threshold shouldn't be a big burden on seniors.
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Re: CPP and OAS

Post by Nortel'd »

Norbert Schlenker wrote:If you look only at the age 60 and 70 total adjustments suggested by the analysis (65% at age 60, 154% at age 70), it's clear that the recent adjustment is close to perfect for early retirement and way wrong for late. A 0.6%/month discount for early retirees calculates out to 64%, which is certainly close enough to what was determined to be fair. The 0.7%/month premium for late retirees, though, should be closer to 0.9%. It would be interesting to know why they didn't come closer for retirees over 65. If there's a pot simmering on the back burner that will raise normal CPP retirement age above 65, a la Social Security in the US, the simple way to ease into that is a financial incentive that delays people starting their pensions. As it is, they're incenting everyone to wait no later than age 65.
I added a 0.9% column to my data and interestingly enough the break-even year aligns with three of my other scenarios.
Note: My new calculations now using a 19.20% after-tax on my after 65 net-income. I forgot I had RRSPs to cash-in.
I am attaching a pdf file to summarize my findings.
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Re: CPP and OAS

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zinfit wrote:I don't have a problem with increasing the age eligibility over time. I do believe that the clawback threshold should be lowered.Its seems absurd that a couple with a combined income of 135k[67 each] would not be looking at the clawback. A 50k per person threshold shouldn't be a big burden on seniors.
Or, why should a "never worked" spouse be eligible for OAS when the other spouse has his/hers clawed back at $1xxK? Not being in that category (too young, I hope) I'm only assuming that the spouse of a $150K retiree without income would still get OAS, is that assumption valid?
I don't intend to offend anyone, that part is just a bonus.

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Re: CPP and OAS

Post by brucecohen »

kumquat wrote: Or, why should a "never worked" spouse be eligible for OAS when the other spouse has his/hers clawed back at $1xxK? Not being in that category (too young, I hope) I'm only assuming that the spouse of a $150K retiree without income would still get OAS, is that assumption valid?
Yes, at present the clawback calc is based on individual -- not joint -- income.
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Re: CPP and OAS

Post by AltaRed »

Which is why the current way of calculating OAS is absurd.
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Re: CPP and OAS

Post by Brix »

kumquat wrote:Or, why should a "never worked" spouse be eligible for OAS when the other spouse has his/hers clawed back at $1xxK?
So that he's not absolutely, 100% dependent on his wealthy wife: "OK dear, but do remember I can take my $6481.44 a year and walk right out of here if you push me too far." :wink:
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Re: CPP and OAS

Post by patriot1 »

brucecohen wrote: Yes, at present the clawback calc is based on individual -- not joint -- income.
But if the clawback were based on joint income wouldn't the government be paying more in total? The higher income spouses who would drop below the clawback would far outweigh the lower income spouses who would rise above it.

That's assuming the clawback thresholds for a couple would be 2x that for an individual, of course.
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Re: CPP and OAS

Post by AltaRed »

patriot1 wrote:That's assuming the clawback thresholds for a couple would be 2x that for an individual, of course.
There is precedent for ratios used in other things, including joint filing in the USA. Perhaps a couple should not be more than about 150% of a single.
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Re: CPP and OAS

Post by patriot1 »

We also have a precedent for pension income splitting right here in Canada. :wink:
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Re: CPP and OAS

Post by izzy »

There is an assumption underlying this argument that OAS is non-contributory and therefore just another form of welfare.Whilst this is open to discussion I'm not sure it's completely true.One only gets the full amount of OAS if one has lived,and presumably paid taxes in Canada for 40 years,indeed 10 years is necessary to receive any at all.Whilst there is no explicit premium paid it is therefore implied and need is not the main criterion unlike a welfare payment.Contrast this with the Australian pension where the pension is payable based purely on need after a minimum period of residence but once one qualifies the amount received is not based on the number of years of residence but on need and can be justifiably be regarded as a welfare payment.Would many here accept the premise that user fees should be applied to medicare coverage based on ability to pay?after all in most provinces it also is financed from tax revenue.Many of us might not be seriously hurt by the loss of OAS but I suspect a considerable number would be seriously inconvenienced by application of the precedent to other benefits we "enjoy" as citizens.
Last edited by izzy on 31 Jan 2012 23:15, edited 1 time in total.
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Re: CPP and OAS

Post by ghariton »

izzy wrote:One only gets the full amount of OAS if one has lived,and presumably paid taxes in Canada for 40 years
About half of all Canadians pay no income tax.

OAS had a legitimate role when it was first introduced. There were few other sources of retirement income, and seniors were notoriously poor. Things have changed.
Would any one here accept the premise that user fees should be applied to medicare coverage based on ability to pay?
I think it is a necessary reform that will have to come sooner or later.
Many of us here might not be seriously hurt by the loss of OAS but I suspect a considerable number would be seriously inconvenienced.
If some of the more gloomy predictions come about, we will be happy if the worst that happens to us is "inconvenience".

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Re: CPP and OAS

Post by izzy »

ghariton wrote:
izzy wrote:One only gets the full amount of OAS if one has lived,and presumably paid taxes in Canada for 40 years
About half of all Canadians pay no income tax.
And they would get OAS or similar benefits following any change anyway
Would any one here accept the premise that user fees should be applied to medicare coverage based on ability to pay?
I think it is a necessary reform that will have to come sooner or later.
Many of us here might not be seriously hurt by the loss of OAS but I suspect a considerable number would be seriously inconvenienced.
If some of the more gloomy predictions come about, we will be happy if the worst that happens to us is "inconvenience".

George[/quote]
Serious inconvenience is problematic though.
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Re: CPP and OAS

Post by patriot1 »

ghariton wrote: About half of all Canadians pay no income tax.
That is, half of Canadians at any given time.

The proportion of Canadians who never pay income tax is a lot lower.
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Re: CPP and OAS

Post by Flights of Fancy »

AltaRed wrote:
patriot1 wrote:That's assuming the clawback thresholds for a couple would be 2x that for an individual, of course.
There is precedent for ratios used in other things, including joint filing in the USA. Perhaps a couple should not be more than about 150% of a single.
Every other (federal) social benefit delivered through the income tax system (just the ones that put cash in pockets, not non-refundable credits) is based on household income, not individual income: UCCB, CTTB, NCBS and GST credit. I actually don't understand why OAS is different.

All of the benefits I listed are intended to offset the cost of raising children or the impact of GST on low-income households, presumably goals which we as a society have decided are worthy of support. I keep hearing "keeping seniors out of poverty" as the explanation for OAS, but seniors as a group are perhaps the wealthiest cohort (not always realized wealth, I understand that) of all currently.

I note as well that each of those benefits are income-tested and the "clawbacks" (they are never referred to as such, at least as far as I can tell, perhaps because there is not a well-organized constituency lobbying on behalf of the recipients and framing them as "clawbacks") start at much MUCH lower levels than OAS. (UCCB is something of a exception to that rule, as the clawbacks start at much higher income levels than for the others.)

It does seem to me that there is a very different notion of poverty and the role of social benefits in ameliorating it when you are comparing people over 65 and parents with children under 18 (when CCTB is cut off; if I recall correctly, NCBS and UCCB end when the child is 7). If a senior earning under $60K-ish (and a household with $120K-ish; I don't know the specific cut-offs) is worthy of financial support, I don't understand why the clawbacks for family benefits start at much lower levels (NCBS clawbacks start at family income of about $22K and CCTB clawbacks start at family income of about $40K, assuming one child under 18).

This post probably sounds more whiny or provocative than I intend it to. I'm just mystified when I hear the rationale of ameliorating poverty used *in a blanket way* (and not necessarily here) to justify OAS at the current clawback levels.
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Re: CPP and OAS

Post by brucecohen »

Flights of Fancy wrote: Every other (federal) social benefit delivered through the income tax system (just the ones that put cash in pockets, not non-refundable credits) is based on household income, not individual income: UCCB, CTTB, NCBS and GST credit. I actually don't understand why OAS is different.
Paul Martin's Senior's Benefit reform -- proposed in 1996 -- used household income and met heavy pushback from women's groups who asserted that OAS/GIS was the only money that many elderly women could call their own. That might have been true then, but the number of retired full-time homemakers has declined every year since. (If you're suggesting that all clawbacks should be consistent, I agree. I also feel that some, probably much, of the money spent on benefits and tax expenditures for seniors should be redirected to help those with young children.)

RE: George's point that OAS was introduced at a time when there was widespread poverty among older Canadians. Very true. But while seniors collectively are now the wealthiest group in Canada, there is still a large number facing poverty. Here we see that just over one-third of all OAS recipients also get GIS. I don't know if the GIS recipient population is heavily skewed toward the advanced elderly; I suspect it is. Note that the GIS clawback is pretty onerous: the recipient loses 50 cents of benefit for every $1 of other income including C/QPP but excluding OAS, $500 of employment income and federal/provincial welfare payments based on a means or income test. This clawback is based on joint, not individual income, for couples. OTOH, GIS is tax-free. Though I have no stats, I believe that GIS is of great benefit to unskilled labourers who are too worn out to adequately do their jobs but not medically disabled.
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Re: CPP and OAS

Post by Shine »

Gosh you guys are smart...my head hurts trying to fathom and think through your posts and opposite arguments.

I mean this sincerely.
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Re: CPP and OAS

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I think the reason most react negatively to fiddling with the retirement income system is that we all can see ourselves as retired one day ,retirement income is usually fixed income unlikely to be supplemented from new sources that late in life and government has continuously fiddled with RRSP/RRIF maturity dates and limits etc usually to our detriment.If the stock exchange thrives on certainty retirement planning needs it even more.Successful retirement planning is long term planning and whenever the rules change the plan must change too -just ask Steves about the implications of that.The government plans are the framework on which the rest of the plan is built so such changes cause disproportionate disruption and invoke the law of unintended consequences .
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Re: CPP and OAS

Post by Flights of Fancy »

But problems do not stay solved. Or, put another way, solving one problem doesn't mean the solution must remain in place without change.

I do not think OAS is an example of unintended consequences. Senior poverty - most acute among women, for several obvious reasons - was and is a real problem. However, Canada is widely regarded as having solved that problem. In addition, as more and more women work in the paid labour force (more than 80% of women with children under six years of age describe themselves as full-time participants in the paid labour force, and that proportion goes up as children age), they will have "their own" CPP income to rely on in retirement, so to some extent the problem gets solved by transformations in how women engage with the paid labour force.

If OAS clawback levels are kept in place, that cannot be explained as a way to prevent poverty among seniors. Or it could be, if we also say that we (as a society) care about poverty (defined as living on income below the OAS clawback level) among seniors, but not among any other cohorts.
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Re: CPP and OAS

Post by Bylo Selhi »

izzy wrote:I think the reason most react negatively to fiddling with the retirement income system is that we all can see ourselves as retired one day...
...and because so few of us trust our government(s) to act responsibly when it comes to "so plucking the [Canada] goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing" and droppings.
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Re: CPP and OAS

Post by izzy »

Bylo Selhi wrote:
izzy wrote:I think the reason most react negatively to fiddling with the retirement income system is that we all can see ourselves as retired one day...
...and because so few of us trust our government(s) to act responsibly when it comes to "so plucking the [Canada] goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing" and droppings.
Indeed- and one can hear the hissing already,and it's getting louder-------!
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Re: CPP and OAS

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Globe & Mail:
The Canada Pension Plan’s investment portfolio earned a 6.6 per cent return in the fiscal year ended March 31 thanks entirely to gains from the fund’s private equity investments last year as public stock markets recorded losses.

<snip>

Mr. Denison said CPPIB is still on track to earn the rates of returns it needs to remain sustainable for the next 75 years. The CPPIB needs to earn a “real” rate of return after inflation of 4 per cent annually to meet its payout targets into the future, which requires returns of about 6 per cent annually before inflation at current rates.

The fund’s 10-year annualized rate of return is 6.2 per cent, but its five-year rate of return is just 2.2 per cent because the financial crisis and euro zone turmoil have drive public markets lower.

Mr. Denison said he is confident the fund will earn the average returns it needs over the long-term despite recent short-term turmoil.

Gosh, a target return of 4% real. Isn't that a bit high? (I use a target of 2% real.)

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Re: CPP and OAS

Post by Bylo Selhi »

ghariton wrote:Gosh, a target return of 4% real. Isn't that a bit high? (I use a target of 2% real.)
Perhaps unreal(istic) for these times. But the snippet you quoted suggests why it may be more realistic for CPP's purposes: "rates of returns it needs to remain sustainable for the next 75 years... but its five-year rate of return is just 2.2 per cent because the financial crisis and euro zone turmoil have drive public markets lower."

IOW this too shall pass. Maybe not in your (or my) lifetime. But most likely over the course of the next several decades of CPPIB's projections.
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Re: CPP and OAS

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Bylo Selhi wrote:IOW this too shall pass. Maybe not in your (or my) lifetime. But most likely over the course of the next several decades of CPPIB's projections.
Anything is possible over a 75-year horizon, I suppose. But my impression is that rates of return have been falling over time. This is not just a short-term phenomenon. It's been going on for some 3,000 years now.

If one believes that, in future, the unput in short supply will be labour, not capital, then that should put downward pressure on rates of return for the next century or so. After that, who knows?

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