Canada can reduce pressure on the federal operating budget and manage rising defence costs without raising taxes. Here's our plan.

Prime Minister Carney’s mandate letter commits to bring costs down, help Canadians get ahead, catalyze a modern housing industry, and reduce unnecessary government spending.

As the government works to deliver on this vision, modernizing retirement income subsidies merits immediate scrutiny. Responsible changes to better align retirement policies created decades ago with today's needs are necessary to protect sustainable income supports for retirees, while also growing funds to reduce costs and reverse the deteriorating wellbeing of younger Canadians. All with no new taxes.

The need to update Canada’s retirement policy ecosystem is not new. In the 1990s, the Chrétien government highlighted the need for reform to manage pressures from Canada’s aging population, and reduce financial burdens for younger generations. Chrétien began this process with sweeping changes to protect the sustainability of the Canada Pension Plan – the success of which is now a key part of his legacy as Prime Minister. As Canada faces down US economic threats, growing global insecurity, and rising deficits, today it is ‘better late than never’ to deliver the similar reforms to Old Age Security and retirement tax policy.

Recommendation 1: Modernize income eligibility thresholds for Old Age Security

Canada’s Auditor General recently concluded that Ottawa doesn’t know what outcomes our Old Age Security (OAS) program achieves, despite the fact that spending will top $86 billion this year (nearly 1/5 of the federal budget), with costs rising to over $100 billion by 2029. Given the scale of this investment, our failure to ensure these funds lift all seniors out of poverty clearly signals the need for reform.

OAS is unusual in the generosity it shows to financially secure families, including by comparison with other income support programs. OAS delivers gives $18,000 a year in taxpayer funded cash benefits to retired couples with $180,000 in income. In contrast, the Canada Child Benefit is clawed back at just $79,000 of household income, despite the fact families with kids have higher rates of poverty, less wealth, and are more likely to be struggling to access affordable housing.

Canada could pay for the increased investments needed to completely eliminate seniors’ poverty, and deliver additional support for other groups facing economic precarity, by changing the income threshold at which OAS benefits are clawed back to $100,000 in household income. Our modeling, using Statistics Canada’s Social Policy Database and Model, shows Canada would save approximately $7 billion/year. Of this amount, about $2.5 billion would be required to add $5,000 for every one of the 400,000 seniors who fall below the official poverty line. The remainder could be invested in a range of ways (e.g. increasing the workers benefit, growing funds for affordable and non-market housing or $10 a day child care, ramping up defence spending, reducing the deficit, etc.).

Public opinion polling confirms that most Canadians (including three-quarters of seniors) agree that it’s time to change OAS eligibility thresholds, and that it’s appropriate to ask retirees with six figure incomes to accept fewer taxpayer dollars. Financially secure retirees are saying they’re prepared to do their part by taking less from OAS.

Recommendation 2: Eliminate outdated tax credits that don’t deliver financial support to those who need it

The Age and Pension Income Tax Credits for retirees cost Canadians $7 billion each year, but fail to help most seniors with incomes below ~$25,000, because the credits are not refundable. Income statistics from the Canada Revenue Agency confirm that just 39% of those who claim the Age credit, and 17% of those who claim the Pension Income credit, report incomes below $25,000. This reveals that many of the lowest-income retirees gain little or nothing from these costly tax subsidies, despite meeting income eligibility. Redirecting funds from these inefficient tax credit to the GIS/OAS system would be a far better way to improve income security for economically-marginalized retirees.

The Age Credit costs $5.5 billion each year. This is equivalent to Ottawa’s entire 2023 investment in $10-a-day child care – a sum widely celebrated as historic. The credit shelters $8,000 of income from taxation for those over 64, delivering a maximum benefit of $1,200 for retirees with moderate incomes between $25,000 and $40,000. While it gradually declines thereafter, it still delivers benefits to retirees with incomes near $100,000. In light of Statistics Canada findings that many younger people are delaying or forgoing parenthood due to financial pressures caused by the growing gap between housing costs and earnings, the age-based design of this tax shelter appears increasingly arbitrary – especially when those over age 64 have the most wealth and least poverty of any age group. 

The Pension Income Credit costs Ottawa $1.4-billion annually. It enables any retiree to shelter $2,000 in pension income from taxation, saving approximately $295 for seniors with incomes above $25,000 – an amount that does not decline in value as income rises. This credit privileges pension income over earnings from paid work, even though low-wage workers face higher risks of poverty and housing insecurity than retirees.

These credits were identified for elimination under the Chrétien government, to preserve funds to respond to predictable pressures on OAS as a result of population aging. With deficits now ballooning, it is timely to reconsider this wisdom.

Recommendation 3: Invest in eliminating seniors’ poverty, improving income security, and lowering costs for younger and working age Canadians

Recommendations 1 and 2 will generate approximately $14 billion in annual savings. These savings can be reinvested to bring down costs and help Canadians get ahead – while also ensuring that taxpayer funds are spent efficiently by Ottawa.

Without raising taxes, our recommendations would permit the Carney government to pursue the following goals:

• Eliminate seniors’ poverty
• Invest more in Build Homes Canada, to grow affordable housing supply
• Lower child care and postsecondary costs to help restore “the bargain that hard work means a good life” for Millennials and Gen Z (Liberal platform, p. 30)
• Support Canadians with higher costs by increasing direct benefits like the GST credit, workers benefit, etc.
• Grow defence spending to meet NATO targets and protect Canadian sovereignty
• Reduce the operating deficit

As the government reviews spending and seeks high-impact investments, it is timely to modernize subsidies for financially secure retirees to help Canada meet the pressures of the current moment. The fiscal return is high – and Canadians are ready.