The federal government is increasing the eligibility age for Old Age Security (OAS) to age 67 from 65 to reflect the reality that Canadians are living longer and healthier lives, and may prefer to keep working. However, the changes won’t begin to take effect for another 11 years.

Federal Finance Minister Jim Flaherty announced the adjustments in today’s federal budget, which also includes spending cuts totalling more than $5 billion.

The eligibility age for the OAS program will be gradually raised starting in 2023, with full implementation by 2029. The change will not affect those 54 years of age and older, as of March 31, 2012. Those born on or after February 1, 1962, will have an eligibility age of 67. Those born between April 1, 1958, and Jan. 31, 1962, will be part of the phase-in period and will have an eligibility age between 65 and 67.

“If you’re an older person, you might be a bit concerned,” says Doug Carroll, vice-president, tax and estate planning, with Invesco Trimark, who was in the budget lockup with Benefits Canada‘s sister publication, “OAS is a fairly small component of most people’s financial plans, if they are also involved in private savings. It’s a discussion point but I don’t see it affecting calculations in a really significant way.”

The budget also includes a new deferral option for OAS. As of next year, Canadians can voluntarily defer their OAS pension for up to five years, allowing for an actuarially adjusted higher pension payment in later years.

For example, someone turning 65 in 2013 can defer receiving OAS until he or she reaches the age of 70, resulting in an annual payment of $8,814 instead of $6,481.

“You can defer your OAS in the same way you can now defer your CPP,” Carroll notes.

Ottawa is also introducing a “proactive enrollment regime” for OAS that will eliminate the need for many seniors to apply. The OAS is the single largest federal government program, costing Ottawa $38 billion in 2011 and projected to increase to $108 billion by 2030.

There are no changes to CPP contribution rates and Ottawa is moving forward on the implementation of pooled registered pension plans.

The budget includes minor tweaks to retirement compensation arrangements (RCAs), with Ottawa noting that that the Canada Revenue Agency has identified some arrangements that seek to take advantage of various features of RCA rules in order to obtain tax benefits. The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. The rules are based on existing regulations for tax-free savings accounts and RRSPs.

“The rules being brought forward appear to be directed at the closing of tax loopholes that the government has perceived as a problem,” says Carroll.

Following a review, the government is adjusting the rules concerning registered disability savings plans (RDSPs), making them more flexible. For instance, the measures provide for an increase in the annual maximum withdrawal limit. Also, parents with registered education savings plans (RESPs) for children with disabilities will be permitted to transfer investment income earned in an RESP to an RDSP, tax-free. RDSPs can only be established for those eligible for the Disability Tax Credit. Currently, when a recipient loses eligibility for the DTC, the RDSP must be shut down the following year. The budget proposes to extend the period for which an RDSP may remain open after the beneficiary becomes DTC-ineligible.

The government’s ongoing review of program spending has led to a reduction of $5.2 billion, about 7% of the total, an amount Ottawa says is “modest and measured.” Most government departments will feel the pinch; $112 million will be cut from the Health portfolio, $52 million from Heritage and $180 million from international development assistance programs, including CIDA.

The spending reduction is expected to lead to the elimination of 12,000 government jobs over a three-year period, mostly in the Ottawa region. In total, federal employment will be reduced by about 19,200 jobs, or 4.8%. Ottawa says that’s about one-third of the job cuts introduced following a similar review in the 1990s, when 50,000 jobs were cut.

“We will implement moderate restraint in government spending,” Flaherty said in his budget speech. “The vast majority of the savings will come from eliminating waste in the internal operations of government, making it leaner and more efficient.”

Despite the cuts, Ottawa is also introducing a number of new spending initiatives, including more than $1 billion on science and technology, $500 million to grow start-ups and $275 million on First Nations education.

The deficit will be reduced, with $12 billion in cuts expected over the next two fiscal years. The deficit is projected to decline to $1.3 billion by 2014/15 from $24.9 billion in 2011/12.

Changes to employment insurance (EI) include limiting EI rate increases to no more than five cents per year until the overall EI account is balanced Ottawa proposes to spend about $21 million to help unemployed workers find jobs more quickly and $74 million on a pilot project that will reduce the clawback rate applied to workers who earn money while on EI. An additional $387 million has been earmarked to align the calculation of EI benefits with local labour market conditions.

Finally, the federal government is getting rid of the penny. As of this fall, the Royal Canadian Mint will no longer produce the coins, although they still can be used in transactions indefinitely. If no pennies are available, the government suggests rounding the price to the nearest five cents.

“Pennies take up too much space on our dressers at home,” said Flaherty. “It costs taxpayers a penny-and-a-half every time we make one. We will, therefore, stop making them.”

Doug Watt is an Ottawa-based writer and editor.

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George Tamburri:

I’m disappointed that changes are allways for the worst for us Canadians, because we live a little longer we are penalized again instead of moving forward and enhance life. If you are the government official who sits behind his desk and things of this kind of change you should be ashamed of yourself! the one that thought and initiated this change will have his day later in life when the person realizes that this was the wrong thing to do.

Friday, March 30 at 9:06 am | Reply

John Nodoe:

In response to the comment concerning people wanting to work past 65 years of age: I suggest there is a group of hard working tax paying labourers out there who would prefer to retire at the age of 65…people who actually have to work with their bare hands under labour intensive conditions…one example would be wood cutters who struggle with a chainsaw until the age of 65…people who thought a small (OAS) pension was waiting for them at 65…I wonder if the individuals making the decision to raise the pension age to 67 considered these hard working folks…or folks who still use a pick and shovel…people who are helpers in fish plants…people who work on railroads…mechanical trades that demand physical labour…carpenters…farmers who still need their physical strength to supplement daily chores…I can fully understand people wanting to work after 65 if their health was intact but what about the folks that are struggling to reach 65 and obtain the OAS so they can retire because of poor health? I think many businesses will find older employees (between 65/67) depending on long term disability if the company that employs them has a group plan…I think raising the age to 67 will result in younger people suffering…less work available for them…I think there will be tired nurses,teachers and other decision makers in the work force…I suggest these blue collar workers are not as important to the politicians implementing this pension change as they were on election day.

Saturday, March 31 at 4:11 pm | Reply

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