Canadians who will be affected by the increase in the age of eligibility to receive the Old Age Security (OAS) will have time to cope with the change and offset any reduction in benefits.
The federal government's announcement that it plans to increase the age at which Canadians receive the OAS and the Guaranteed Income Supplement (GIS) from 65 to 67 between the years 2023 and 2029 has stirred a lot of controversy, but with some planning those affected will be have time to adjust.
"The advance warning gives Canadians a reasonable amount of time to try to cope with the changes," says Dave Ablett, director of tax retirement and planning at Investors Group. "Some have suggested working longer before retiring is an option. Others may think about scaling back their planned retirement lifestyle. But increasing your personal saving and investing rate also is an option worth looking at."
The OAS pays $540 a month and is indexed annually with the cost of living.
Someone born before Feb. 1, 1962 (50 years old today), for example, would have to increase their saving and investing by about $75 a month -- based on the assumption the benefits are indexed at three per cent annually and get a five per cent annual rate of return in an RRSP -- to generate $20,595 needed to offset the OAS benefits they would have received between the ages of 65 and 67.
Someone born two years earlier would begin receiving OAS benefits at age 66 and would only need to increase their saving and investing by $44 a month - based on the same assumptions - to offset $9,563 in OAS benefits they would miss.
"For people with a private or public pension, this may not be a big inconvenience, but for lower income people it may be a larger issue and it may be important for them to realize now what they need to save more to offset the loss of benefits," Ablett says. "Notifying people now of the changes certainly alerts people to what they have to do."
The changes also affect the Guaranteed Income Supplement (GIS), which is a maximum payment of $732.36 a month to lower income Canadians, depending on their level of income. "These individuals will need to become more active to increase their saving and investing," Ablett says. "The new Tax Free Savings Account could be really valuable for this group of people as a way to save and supplement their income tax free."
A couple of other important changes have gone largely unnoticed amid all the controversy and political noise surrounding the increase in the age of eligibility.
To improve service to seniors, the government will implement a new proactive enrolment process that will eliminate the need for many seniors to apply for the OAS and GIS pensions.
As well, the government is proposing to give people the option to voluntarily defer receiving the OAS by up to five years until age 70 in order to receive a higher, actuarially-adjusted pension beginning in July of 2013. By opting to defer receiving the OAS seniors can end up increasing their pensions by 7.2 per cent a year or 36 per cent over the five years.
"A lot of people are going to have to make a decision based on their health and life expectancy," Ablett says. "If you delay the payments by five years you essentially will have to live to 85 in order for the payments to become equal. For a lot of individuals it will be better to take it earlier, but they should consult a financial professional to see which option is best for them."
The government says it is making the changes to ensure the long-term viability of the program. The OAS is the single largest federal program. It is financed from general government revenues and provides benefits to most Canadians 65 and older.
Canadians are living longer - there will be almost twice as many seniors in Canada in 2030 than there were in 2011 - growing to 9.4 million from five million, a reality the government believes will place significantly more pressure on the OAS program to remain financially viable.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2012 Talbot Boggs
