Tax, benefit clawbacks hurt seniors’ retirement income

Low-income seniors face extremely heavy tax burdens across Canada, says a C.D. Howe Institute report.

In Who Loses Most? The Impact of Taxes and Transfers on Retirement Incomes, authors Finn Poschmann and Alexandre Laurin show that seniors can be hit hard by taxes and benefit clawbacks in retirement.

“Our analysis shows that effective tax rates are very high for low-income seniors, and taper off for seniors with higher incomes,” Laurin explains. “The trend is especially true in the Western provinces, notably in Saskatchewan, Manitoba and British Columbia.”

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The study focuses on the taxation of income received in senior years—when individuals become eligible for age-related benefits paid through or alongside the tax system, such as the Guaranteed Income Supplement and Old Age Security pension.

The authors’ calculations also indicate that low income employees who save under new Ontario and Quebec pension plans will receive very little net benefit from the savings they put aside.

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The result of these heavy tax burdens—punitive in some cases—is that many seniors are unrewarded for their past earnings, savings, and foregone consumption.

The authors recommend that the provinces think very carefully about the design of the tax, benefit and pension programs they initiate, to avoid stacking benefit reductions, clawbacks and taxes that generate punitive results.

Poschmann adds, “high effective rates alter individual savings behaviour. We should expect more future savings will be channelled away from registered retirement savings plans, and into tax-free savings accounts and unregistered savings vehicles.”

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