While the pre-budget hype was that Canadian baby boomers were going to have to delay their retirement after Thursday’s federal budget was unveiled, their Findependence Day has not been severely postponed for anyone who is now 54 years old or older as of March 31, 2012.
As expected, the Old Age Security eligibility age will rise gradually from the current 65 to 67 but this doesn’t start to happen until 2023, according to the just-released budget. When you add the 11-year notification of this change to the six-year phase-in between 2023 and 2029, I’d agree with Finance Minister Jim Flaherty that Canadians [or their financial planners] have “ample time to make adjustments to their retirement plans.”
For younger people born on or after Feb. 1, 1962, OAS eligibility will be age 67. Technically, boomers were born between 1946 and 1964 but in my view, if you were born between 1962 and 1964, you likely didn’t grieve over the JFK assassination and can hardly be considered a true baby boomer.
Delaying retirement: OAS takes a leaf from deferred CPP benefits
Most interesting is the fact the OAS program is being tweaked to reward those wishing to delay retirement, somewhat like the Canada Pension Plan pays better the longer you delay receiving benefits. Canadians can voluntarily defer receiving OAS payments for up to five years, beginning on July 1, 2013. So, for example, if you delayed receiving OAS until 66 rather than 65, the payout would be $6,948 rather than $6,481.
Coupled with delaying CPP, it’s clear many workers with marginal incomes will have two strong incentives to keep working right up to age 70. Apart from the higher CPP and OAS payouts, investment portfolios will have that much more time to grow: including Tax Free Savings Accounts (TFSAs). And as any financial planner can tell you, five extra years of working and saving also means five fewer years of spending down a portfolio.
Seniors will now be enrolled automatically into the OAS and GIS (Guaranteed Income Supplement) programs rather than leaving it up to citizens to apply. Previously, many seniors missed out on benefits because they failed to apply and even once they learned they had to apply, were shortchanged because of limited retroactivity. Credit the NDP for making this suggestion earlier this month.
The poorest seniors already got a raise of sorts when the government boosted GIS payments as of last July. More affluent senior couples already benefit from pension income splitting, a fact that will become apparent when they file their annual taxes before the end of April.
For seniors who delay OAS/CPP, TFSAs will be a boon
To the extent this is an austerity budget designed to slay the federal deficit, it will hasten the day when previous promises kick in and the nation’s books are balanced. Budget 2012 aims to do that by 2015-2016. If that happens, then TFSA contribution limits will double to $10,000 from the current $5,000. The TFSA will be a real boon to lower-income seniors because it won’t trigger OAS clawbacks or various means-tested benefits. Those who delay receiving CPP/OAS until 70 will be able to build up much larger TFSAs that will ultimately spin off tax-free income: the potential exists to contribute an extra $50,000 if the deficit is eliminated and they contribute $10,000 a year from 2016 to 2021.
The Tories have also previously promised that once the books are balanced they will introduce income splitting for families with children under the age of 18. While Ottawa has so far opted for Pooled Registered Pension Plans (PRPPs) over an expanded CPP, the country’s baby boomers now have most of the necessary tools to build financial independence.
It’s still important to save and invest but boomers who had a late start have a reprieve if they choose to stay in the workforce until their late sixties or 70. Meanwhile, those who have long planned for an earlier exit from the workforce can stick with their previous plans — OAS eligibility at 67 is hardly the bogeyman some feared.
Jonathan Chevreau will soon be editor in chief of our sister publication MoneySense. Read more of his blog here.