Turn 71, Take Pension, Pay Tax

I’m approaching my seventy-first birthday later this week. Though 70 is seen as a milestone birthday, 71 is much more significant in terms of pensions and taxation.

In December of the year you turn 71, you must begin receiving your pension. You must also convert your Registered Retirement Savings Plan to a Registered Retirement Income Fund and begin drawing on it.

I’m in the home stretch of contributing to the University of Toronto Pension Plan and will start receiving my pension on December 1. And I’ve converted my not-especially-large RRSP (because I already have a pension from my employer) to a RRIF. And I’m already receiving Canada Pension Plan. Finally, I’m receiving a very small pension from US Social Security in recognition of contributions I made while working in the US part-time as a student and teaching there for two years.

The last part of the picture is Old Age Security (OAS). OAS is a government pension based on residency and citizenship, not on contributions (unlike CPP). The maximum annual OAS payment is $7356, about half of the maximum CPP payment of $14100 (in both cases at age 65). OAS can be clawed back for higher income seniors, with the clawback starting at an annual income of $79,000 and becoming total at an annual income of $128,000.

OAS is paid on an individual basis which, together with the absence of required contributions, is intended to provide independent income for women who have not worked outside the home.

Finally, OAS is a major government program. The federal government’s Estimates for the current fiscal year (ending March 31, 2021), show that the government will spend almost $45 billion on OAS. The Harper Government, concerned about the sustainability of OAS as the baby boom generation retires, introduced a phased increase in the eligibility age from 65 to 67. The Trudeau Liberals reversed this reform as soon as they took office in 2015.

One of the benefits available only to pensioners is that, for tax purposes, pension income can be split between spouses, regardless which spouse receives it. (Similarly, the Harper Government had extended this benefit to all families for employment income, and the Trudeau Liberals reversed this as soon as they took office).

From a tax and policy perspective, it is interesting how OAS and pension income splitting interact. One spouse receiving a considerable pension could split it with the other spouse, and still be eligible for non-reduced OAS. Consider the following case. Retired spouses over the age of 65 have income from other sources totaling $158,000 that they are able to split evenly. Each would be eligible for the maximum non-reduced OAS of $7356, for a total of $14,700 for the couple. A retirement income for a couple of $158,000 is considerable, even in a high-rent city like Toronto. Gilding their lily with another $14,700 hardly seems necessary.

Employment and Social Development Canada, the department that administers OAS, has stated that only 2 percent of OAS recipients have a full clawback and another 5 percent a partial clawback. However, this is based on current rules that accommodate pension income splitting. Change the rules by basing the OAS clawback on total family income, and the extent of the clawback would increase.

Emerging from the pandemic with a greatly increased public sector debt load will require a comprehensive rethinking of public finances. Given its significance in the federal government’s budget, OAS is one program that is bound to draw the attention of politicians and public servants.

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