Financial advisors will need to rework retirement plans for many of their clients, as changes announced by the federal government on Thursday will force many Canadians to work two years longer than planned before becoming eligible for retirement benefits.
In the 2012 federal budget, introduced in Ottawa on Thursday, the federal government announced a plan to increase the age of eligibility for Old Age Security and Guaranteed Income Supplement benefits to 67 from 65. This change will start in April 2023 and will occur gradually over a six-year period, with full implementation by January 2029.
The budget also introduces a new option for individuals who wish to work longer, to begin taking their OAS benefits beyond age 65. Starting on July 1, 2013, individuals can voluntarily defer the OAS pension for up to five years, and subsequently receive a higher, actuarially adjusted pension.
These changes aim to ensure the sustainability of the OAS and GIS programs as the Canadian population ages and the cost of the program surges.
“We will make gradual adjustments to the Old Age Security program, to ensure the next generation can count on it,” Finance Minister Jim Flaherty said in his budget speech on Thursday.
Whereas there are currently four working-age individuals per senior in Canada, Flaherty explained that by 2030, there will be only two working-age individuals per senior. This is a significant change from the 1970s, when there were seven workers for every one person over the age of 65.
Life expectancy has also increased significantly, rising to 79 for men and 83 for women, from 69 for men and 76 for women in 1970.
As this demographic shift occurs, OAS – the government’s single largest program – is set to grow in cost to $108 billion in 2030 from $38 billion in 2011.
“The Old Age Security program was designed for a much different demographic future than Canada faces today,” Flaherty said. “Canadians are living longer and healthier. There are fewer workers to take their place when they retire. Canada has changed. Old Age Security must change with it, to serve the purpose it was intended to serve.”
The plan to increase the age of eligibility for OAS and GIS benefits will not affect anyone who is currently receiving benefits, nor anyone who is 54 years of age or older as of March 31, 2012. People born between April 1, 1958 and January 31, 1962, will become eligible to receive their OAS benefits and GIS between the age of 65 and 67, depending on their birth date.
The 11-year notification period, followed by the six-year phase-in period, is being provided to ensure that individuals have time to adjust their retirement plan accordingly, the government said.
The voluntary deferral of OAS pension, meanwhile, is part of an effort to increase flexibility in the OAS program. Individuals who choose to defer take-up of their OAS would receive a higher pension, calculated on an actuarially neutral basis, as is done with the Canada Pension Plan. As a result, individuals will receive, on average, the same lifetime OAS pensions whether they choose to take it up at the earliest age of eligibility or defer it to a later year.
For example, someone who defers the OAS pension for five years and begins taking it at age 70 would receive an annual pension of $8,814, instead of the $6,481 they would receive if they began taking it at age 65.
Budget 2012 also aims to make it easier for seniors to apply for OAS and GIS, through a “proactive enrolment regime” that the government plans to phase in between 2013 and 2015.
The regime will eliminate the need for many seniors to apply for OAS and GIS, the budget says, reducing the burden on seniors of completing application processes, and reducing the government’s administrative costs.