Some advisors are sug-gesting that saving through RRSPs may not be worthwhile for many people because RRSP withdrawals at retirement will mean the investor is no longer eligible for government benefits such as the guaranteed income supplement. But counting on the GIS to finance retirement may not be wise. Not only are GIS benefits low, but new data from a Statistics Canada study found families receiving the GIS are more financially vulnerable than other families.

In general, families that include senior members have lower after-tax income than younger families. When wealth or net worth is taken into account, however, senior families seem to be better off. But of families with seniors, according to the study, those that are receiving the GIS appear to be the least well off. They have lower median income, lower median assets and lower net worth. They also have lower financial wealth.

Eligibility for the GIS, payable to low-income seniors who are also getting old-age security, is based on income only and does not take assets into account. For every $2 of outside income — not counting OAS — GIS benefits are reduced by $1. But Preston Poon, of the income statistics division of Statistics Canada in Ottawa and author of the study, says the assets and net worth of families getting GIS were lower than their non-GIS counterparts.

The greatest differences, in terms of wealth, says Poon, were found for unattached seniors; those not receiving GIS had roughly six times more in total assets, almost seven times more in financial assets — significantly more for homeowners — and a median net worth almost six times higher. Home ownership is especially important for seniors, he notes, because the vast majority of them are mortgage-free, which makes shelter costs minimal.

Another way to look at financial vulnerability, Poon says, is to look at the capacity to handle an unexpected expense of $5,000. People with moderate or high incomes, or financial wealth, could manage with savings or by selling assets. But Poon’s study found significantly more GIS families reported they either would not be able to manage or would have to borrow money (see table).

About half of unattached GIS recipients and senior GIS couples reported they would have to look beyond their own resources to manage the unexpected expense. The proportion was even higher for other GIS families headed by seniors. But interestingly, the majority of younger families — those not headed by seniors — also said they would have to borrow to deal with it, Poon says.

His study found the majority of GIS families spent all their family income or more. In itself, that is not too troubling, he says. What is important is the rate at which seniors go through their savings. He found in all cases, compared with their non-GIS counterparts, a greater proportion of GIS families had spending levels equal to or greater than their income.

Poon points out that individuals must apply annually for GIS benefits. For those already receiving the benefit, this can be done automatically by filing an income tax return. Otherwise, a detailed income statement and application must be submitted to Social Development Canada. A change in circumstances, such as a lump-sum withdrawal from an RRSP, may mean the individual loses eligibility. He or she would be required to reapply for eligibility the following year.

People who are potentially eligible for GIS may lose out, says Poon, because they don’t realize they have to reapply or don’t understand what determines eligibility. For instance, OAS benefits should not be included in calculating income.

In 2000, only 41% of those who should have applied for GIS did so. The fact that so many people who qualified for GIS were not getting it received quite a bit of publicity. In 2001, a House of Commons committee recommended something be done about it. And, in 2002, Social Development Canada started working with the Canada Revenue Agency to identify eligible individuals using tax data. It is too soon to know what effect this will have on the GIS take-up rate. Although estimates of eligible non-recipients vary widely, Poon says, about 206,800 people who were eligible for GIS in 2000 did not get it, collectively losing out on about $300 million.

@page_break@OAS and GIS benefits are indexed for inflation and adjusted every quarter. But, although OAS benefits are taxable and clawed back for higher-income individuals, GIS is not taxable. The maximum monthly GIS benefit for the first quarter of 2006 is $593.97 for a single individual or $389.67 for each spouse or partner in a senior couple, based on the couple’s joint income. At most, a couple receiving two OAS benefits and two GIS benefits would get about $21,000 a year, assuming they have no income other than OAS. One or both partners will also receive CPP benefits and possibly other income, thus reducing GIS benefits. IE