But it’s not the reform you may think
The debate over Old Age Security (OAS) has become increasingly polarized.
On one side are those who argue that OAS is becoming unaffordable and that higher-income seniors should receive less. They focus on the “clawback” which taxes OAS back to zero only for incomes over $150,000. On the other side are those who view any criticism of OAS as an attack on retirement security itself.
Both sides are missing a more important earlier question. Before we debate where the clawback threshold should be set, we need to ask a more fundamental question: What is OAS actually for?
The answer matters because much of the current debate treats OAS as though it were simply another poverty reduction program. It is not.
Canada already has a poverty reduction program for seniors. The Guaranteed Income Supplement (GIS) was designed to target poverty. OAS was designed as a near-universal retirement benefit recognizing that older Canadians contribute throughout their lives through paid work, taxes, caregiving, volunteering, military service, community building and countless other forms of social contribution. The combination of the two meets both objectives.
The question is not simply whether a senior is poor. The question is when a person’s economic capacity becomes sufficiently large that society withdraws part or all of a universal retirement benefit. Once we frame the issue that way, a different question emerges: How do we determine economic capacity in the first place?
The OAS Recovery Tax, commonly known as the clawback, begins when a senior’s income exceeds a threshold – $95,323 for 2026. OAS is gradually reduced and eventually eliminated for higher-income seniors.
Critics frequently focus on the threshold itself. Why, they ask, should someone earning more than $100,000 receive OAS at all? That is a legitimate question. But it obscures a more fundamental issue.
The clawback is not based on a pure measure of economic capacity. It is based on a tax concept known as net income before adjustments. Like most tax measures, it reflects a series of policy choices about what counts and what does not.
The current system assumes that annual income is a reasonable proxy for economic capacity. Often it is. But often it is not.
Consider two seniors who each report $110,000 of annual income. The first enjoys relatively good health and faces few unusual expenses. The second spends $30,000 annually on hearing aids, prescription drugs, home modifications, transportation to medical appointments, private dementia care, personal support workers or other age-related costs.
The OAS clawback largely treats them as having the same ability to contribute. Most Canadians would recognize that they do not. The second senior has substantially less disposable income available for housing, food, recreation, family support and everyday living.
Yet the clawback calculation largely ignores this distinction. This matters because aging often brings unavoidable costs. The public often imagines seniors affected by the clawback as affluent retirees enjoying comfortable lives. Some certainly are.
But many seniors facing recovery taxes are also coping with Parkinson’s disease, cancer, dementia, severe hearing loss, vision impairment, mobility limitations or other age-related conditions that impose substantial financial burdens.
Such expenses are not discretionary. They are unavoidable.
The income tax system recognizes many of these costs through the Medical Expense Tax Credit. Yet they generally do not reduce the income measure used to determine OAS recovery tax. As a result, the clawback’s tax-defined income can overstate actual economic capacity.
The problem may be worse when we consider wealth. Many critics of OAS argue that higher-income seniors should receive less public support. Perhaps.
But if the objective is truly to target support according to economic capacity, then income alone is an incomplete measure. A retired homeowner living in a multi-million-dollar mortgage-free property with substantial investment assets may receive full OAS if their annual income remains below the threshold.
Meanwhile, a senior with modest assets but elevated income from thoughtfully accrued retirement savings, but facing large caregiving expenses or medical costs could face significant clawbacks.
These illustrations show how imperfect annual tax-system defined income can be as a measure of economic capacity.
The issue becomes even more complicated because retirement income is often irregular.
The clawback assumes income arrives in smooth annual increments. Retirement rarely works that way. A senior may experience temporary income spikes because of the sale of a cottage, the sale of a business, the death of a spouse, capital gains realization or major life transitions, for example.
A single year’s income can bear little resemblance to a person’s longer-term financial circumstances. Yet the clawback system evaluates seniors one tax year at a time.
This annual approach may be administratively simple, but it can fail to reflect actual economic capacity over the course of retirement.
The answer is not necessarily to lower the clawback threshold; nor making the clawback more aggressive. Better is to build a smarter measure of economic capacity.
One possibility would be to recognize extraordinary medical and care costs above a specified threshold when calculating OAS recovery tax through recognition of medical expenses already reported to the CRA. Another would be to explore averaging mechanisms for unusually large retirement income spikes that do not reflect ongoing financial capacity.
Canada has spent decades debating who should receive OAS. We have spent far less time asking whether we are measuring economic capacity correctly in the first place. That may be the more important question.
Photo courtesy of DepositPhotos
