OAS eligibility to go back to 65. What this means for clients

Prime Minister Justin Trudeau confirmed today that OAS eligibility will return to 65 in next week’s budget.

“Next week’s budget will confirm that we are keeping the old retirement age at 65,” he said during an interview with Bloomberg today in New York. This will reverse the Conservatives’ decision to raise it to 67 beginning in 2023.

“Tweaking the age like that is a very simplistic solution that won’t work to a very complex problem,” Trudeau added.

What does that change mean for clients?

“Somebody that’s in their 50s […] can possibly retire two years sooner, and their monthly or bi-weekly savings might not have to be as aggressive as originally expected,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.

Read: Expect retirement changes in federal budget

In 2012, the then-Conservative government increased the eligibility age to between 65 and 67 for people born April 1, 1958 or later. When fully implemented in 2030, the change was expected to save the government $7.1 billion a year (in 2014 dollars), shows a study from researchers at the University of Laval that was published in the Canadian Tax Journal.

The Conservatives’ plan would have increased the number of 65- and 66-year-olds living below the poverty line by 100,000 people, from 6% to 17% of that demographic, the researchers calculate.

The reversal, expected in the Liberals’ March 22 budget, would bring everyone’s age of OAS eligibility back to 65.

The change would send advisors who had updated clients’ financial plans to reflect later OAS benefits back to the drawing board.

“Those models are going to have to be adjusted to factor in that OAS and, if applicable, GIS, would be payable still at 65,” says Frank Di Pietro, director, Tax and Estate Planning, at Mackenzie Investments.

Read: The design and depletion of retirement portfolios

Boost to clients

The Conservative plan was supposed to be phased in, starting in April 2023 and ending in January 2029. People born on Feb. 1, 1962 or later, the oldest of whom are presently 54, would have been most affected, says Di Pietro.

“Those are the individuals who wouldn’t have been able to collect Old Age Security until age 67,” he explains. “The retirement income projections for those clients will [likely] change, but for those born before March 1, 1958, [projections] won’t change.”

At 2016 benefit levels, two fewer years of eligibility would cost clients about $13,700 each in forgone income. “That shortfall has to come from your retirement savings,” says Shelestowsky.

Consider the impact on a married couple, Bill and Padma, each born in July 1958, each making $50,000. Their advisor wants to fund their retirements, assuming Bill will live until 91 and Padma will live until 95.

If they want to retire at 65 with $60,000 in combined income, they would have to save $934,777 if they aren’t eligible for OAS at age 65. With OAS eligibility at 65, they would need $903,681, calculates Shelestowsky.

“Delaying the OAS by two years means $30,000 more in savings they would need to fund that shortfall,” explains Shelestowsky.

Seniors in their 60s also tend to spend more than people in later years of retirement, he notes. So two fewer years of OAS would come at a particularly inconvenient time.

Click on this table from the 2012 budget to see how much your clients are affected by current rules:

Click on the image to enlarge it.

The present rules also affect eligibility for the OAS allowance. Currently, those aged 60 to 64 are able to claim the allowance, increasing to ages 62 to 66 starting in 2023. The Liberals haven’t indicated whether this change will be reversed in the budget.

Read: CPP to be expanded within the year

RRSP consequences

There is one downside to receiving OAS at 65, notes Shelestowsky, though he says it’s far outweighed by the benefit of extra cash.

Clients who have accumulated a lot of money in their RRSPs, and who retire in their early 60s, may benefit from taking investments out of registered accounts before OAS (and CPP) income pushes them into a higher tax bracket.

It’s a helpful strategy for clients who want to withdraw strategically from their RRIF before the minimums kick in at age 71. If those clients had planned to start receiving OAS at 67, but are now eligible at age 65, their window of opportunity to make withdrawals has shrunk.

“At age 65, you can start taking money out of your RRIF,” he says. “It counts toward the pension tax credit, so [currently there is] a two-year period where you can take money out of your RRIF and get the pension tax credit before the OAS kicks in.”

“It’s all about trying to keep the income as low as possible while we’re de-registering the RRSP or RRIF,” he adds. “This hinders that strategy a little bit, but the pros far outweigh the cons.”

Read: Liberals to discuss budget, economy during cabinet meeting

OAS deferral and clawbacks

In 2012, the government also gave people the option to delay receiving their OAS by up to five years, in exchange for larger payments later on. Shelewstowsky says none of his clients have deferred their payments, and that choosing bigger payments later on may cause tax problems.

“A bigger OAS means more income, and that could take them over the OAS clawback [threshold]”, he says. “Also, they’d be in a higher tax bracket on RRIF withdrawals.”

When the Conservatives first introduced the changes, some in the financial community had hoped the government would also raise the clawback thresholds.

The government reduces OAS benefits at a rate of 15% once someone’s net income reaches $73,756. Anyone with $119,398 of retirement income or more isn’t eligible.

Higher thresholds, which would have helped wealthier Canadians, didn’t happen, and it’s unlikely the Liberals would raise the clawback levels now, says Di Pietro. “The Liberals seem to be focused on reducing benefits for the wealthy, and the clawback is designed to do that,” he notes.

There are other strategies to avoid hitting the threshold, says Stephen Miao, managing director and senior vice-president at BMO Nesbitt Burns.

Married clients can split up to 50% of their pension incomes with their spouses, he notes. He also helps retiring clients time large capital dispositions, such as selling a cottage or rental properties, so the profit doesn’t unnecessarily impact their incomes, and therefore their benefits. “If they were to sell them too early or too late, it would impact their tax bracket,” he adds.

Read: TFSA or RRSP? The GIS may change the answer

GIS boost

Finance Minister Bill Morneau is also expected to increase GIS benefits for low-income single seniors by 10%, or nearly $1,000, every year. This was another Liberal campaign pledge, and one he’s mentioned in the weeks leading up to this budget.

Single seniors eligible for GIS can earn no more than $17,304 a year, so it’s unlikely this will affect your clients. Shelestowsky says it may help some business owners whose companies have minimal assets, and who won’t have anything to sell when they retire.

But for low-income seniors, it would be a big help. For people with income “under the $30,000 to $35,000 level, OAS, GIS and CPP ends up representing 75% to 80% of their retirement income,” says Di Pietro.

With the anticipated changes to OAS and GIS, plus an overhaul of the CPP on the 2016 national agenda, Di Pietro doesn’t expect any other retirement benefit changes in the budget. He adds, “reinstating the OAS to 65 is a significant measure.”