Conservative budget changes retirement landscape
In its most recent budget, the Conservative government maintains that it is making hard choices now so that federal programs and benefits are sustainable over the long term. But that’s debatable.
Earlier this week, Ontario public servants learned that the provincial government will freeze their wages for the next two years and demand they pay more into their pensions, pool the plans or reduce benefits.
Not to be outdone, Finance Minister Jim Flaherty today announced that he too plans to make good on his threat to bring generous public service pensions into line with the private sector, boosting the retirement age for future pensioners at the same time.
The number of Canadians over the age of 65 is expected to increase from 4.7 million to 9.3 million over the next 20 years, tripling the cost of the Old Age Security program. To offset this demographic tsunami, Ottawa will modify the OAS program. Along with the Guaranteed Income Supplement, it will now be available at age 67, up from the current age of 65.
There'll be lots of time to get used to the idea, however. The changes will start in 2013 and be phased in through to 2029, meaning it will not affect anyone at, or close to, retirement age assuming they were born before or on March 31, 1958.
As with previous changes to the Canada Pension Plan, anyone wishing to work longer can defer their OAS pension, for up to five years, starting on July 1, 2013.
For example, someone turning 65 in 2013 could hold off on OAS until they reach age 70. This would give them an annual payment of $8,814 instead of $6,481, albeit for a potentially shorter period since no one lives for ever.
But it's hard to see most seniors going this route, particularly as the ability to work into your 70s assumes a level of health that many older Canadians simply don't enjoy.
One thing is clear from the outset though: Since lower-income Canadians have significantly shorter life spans than higher-income Canadians, they'll suffer disproportionately more of any loss in benefits.
Granted, it's a gradual change. Nonetheless, it marks the onset of a growing generational divide between those who will receive the benefit — currently worth roughly $6,000 a year — at 65, and those who will have to wait somewhat longer.
But there is a balance in evidence here.
After announcing that the budget will mean shedding roughly 19,200 government jobs in the coming months, Mr. Flaherty confirmed that the remaining public servants' gold-plated defined-benefit pension plans will soon cost more.
The government will boost members' contribution rates to ensure they are picking up 50 per cent of the cost. Right now, that number is closer to 37 per cent — the balance of which comes from the public purse and represents an unfunded drain on taxpayers.
At the same time, employees who join the public service starting in 2013 will also have their age of retirement moved from 60 to 65.
Although many will view these changes as still being too modest, they could prove quite dramatic and as a move towards matching existing changes in parallel private sector plans.
Members of Parliament's pensions will be included here as well, along with other belt-tightening measures relating to perks and travel. However, the bulk of these changes will be deferred until after the next election in 2015.
That's a crock, of course. MPs enjoy pension benefits worth more than two thirds of their salary — and indexed to inflation — whereas most Canadians are restricted to tax-sheltered pensions worth less than 20 per cent of their annual pre-retirement income.
The government is, however, adjusting the rules governing Registered Disability Savings Plans, making them somewhat more flexible and increasing the annual maximum withdrawal limit.
What's more, parents holding RESPs for children with disabilities will now be allowed to transfer investment income earned in an RESP to an RDSP, tax free — a significant boost to families trying to get out from under the costs of raising a special needs child.
Thanks to more modest spending cuts than rumoured, it's quite clear that the Conservatives want to ensure a balanced budget scenario by the time they head back to the polls again.
That would allow them to keep expensive promises made in previous campaigns to younger voters, such as allowing income splitting for families with children under the age of 18, as well as doubling the limit Canadians can contribute to Tax Free Savings Plans from $5,000 to $10,000.
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