Budget shines spotlight on retirement

The 2012 federal budget makes a number of announcements relating to publicly funded elderly benefits, public sector pensions and private sector retirement saving.

Elderly benefits  

Eligibility ages to increase
As expected, the budget announced that the eligibility age to commence Old Age Security (OAS) benefits will increase. Between April 2023 and January 2029, the OAS eligibility age will rise from 65 to 67 in 28 one-month increments, with the result that the increased OAS eligibility age will affect individuals born in April 1958 or later and individuals born on or after Feb. 1, 1962 will not be eligible to receive OAS before age 67. Individuals age 54 or older on March 31, 2012 will not be affected. Beginning in April 2023, the eligibility age for allowance and the allowance for the survivor – which provide temporary benefits to living or deceased spouses of OAS recipients – will increase from age 60-64 currently to age 62-66.

The budget acknowledges that the cost of provincial and territorial income-support programs could be affected by increased OAS/GIS eligibility ages and states that provinces and territories will be compensated for any “net additional costs” arising from changes to the OAS eligibility age. 

Option to defer OAS
The budget announces that beginning in July 2013, individuals will have the option of deferring receipt of OAS benefits for up to five years and receive an actuarially increased benefit when they elect to commence OAS. The option to delay receipt of OAS benefits, which was recommended by a number of pension experts, will increase retirement-age flexibility for many Canadians. However, the deferral option will not be available for the Guaranteed Income Supplement (GIS) – a component of the OAS program that provides supplementary pensions to low-income seniors. 

Streamlined enrolment
Between 2013 and 2015, the government will implement a new enrollment process that will eliminate the need for many seniors to apply for OAS and GIS. 

Public service and MP pensions
The budget documents state that the government “proposes” to make changes to the Public Service Pension Plan that would require employees to pay 50% of the cost of pension benefits “over time.” Similar changes are proposed to pension plans for the Canadian Forces, the Royal Canadian Mounted Police, Members of Parliament and federal Crown corporations. The budget also proposes to increase the normal retirement for public sector workers hired in 2013 and later from 60 to 65 and that the government will consult with “key stakeholders” regarding changes to public sector pension benefits.

Private pensions and retirement saving

Pooled Registered Pension Plans (PRPPs)
While the budget does not contain any significant new proposals for pension reform, it confirms that the federal government will implement in 2012 the new tax rules for PRPPs that were first announced in December 2011. It does not indicate when the Pooled Registered Pension Plans Act, first introduced on Nov. 17, 2011, is expected to become law.

Pension Benefits Standards Act, 1985
The budget states that the government will introduce “technical amendments” to the Pension Benefits Standards Act, 1985 but provides no information as to the nature of the proposed amendments.

Retirement Compensation Arrangements (RCAs)
An RCA is a supplementary pension arrangement permitted under Part XI.3 of the Income Tax Act. Contributions to an RCA are deductible, subject to a 50% tax that is refunded when benefits are paid out. RCA tax may also be refunded when investments lose value and the ability of the RCA to pay distributions is reduced.

The budget states that the government will introduce legislative changes to prevent RCAs from engaging in “tax motivated transactions,” such as obtaining a refund of RCA tax where RCA assets are depleted by the indirect return of contributions and the use of insurance products to allocate costs to an RCA inappropriately. The budget also announces new prohibited-investment rules for RCAs that have a “specified beneficiary” (i.e., an RCA beneficiary that has a significant interest in the RCA’s sponsoring employer) as well as new rules to impose a special tax on “RCA strip” transactions in which property held by an RCA is depleted in value or transferred from the RCA without adequate consideration. 

While an increase in the OAS eligibility age was widely expected, the budget’s announcement of new flexibility to defer OAS benefits on an actuarially-equivalent basis was not. This new option more closely aligns OAS benefits with the Canada/Quebec Pension Plans, which also provide increased benefits when retirement is delayed. The increased flexibility to defer OAS benefits on a value-equivalent basis may encourage some Canadians to remain in the workforce longer. In terms of effects on employers, delayed receipt of OAS benefits may have the effect of increasing the available supply of older workers, particularly for employers who sponsor DB pension plans that provide actuarially-increased benefits for delayed retirement.

It is not clear from the budget documents what time frame the federal government has in mind for moving to a 50-50 cost-sharing formula for federal public sector pension benefits and it can be expected that the proposed changes will not be welcomed by pension plan members. In proposing similar changes to MP pensions, the federal government seems to be leading by example; however, the proposed changes to parliamentary pensions would not occur until the next parliament – likely at least three years in the future.

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