Hot! Should recent arrivals qualify for Old Age Security?

TheGlobeandMail.com – report-on-business/economy/economy-lab
Posted on Thursday, September 1, 2011.   Kevin Milligan

How much fiscal benefit should Canadians with only a short history of residence in Canada receive? Earlier this week, the NDP withdrew a Private Members’ Motionoriginally submitted by Vancouver East MP Libby Davies on this controversial topic. The NDP motion echoed a previous proposal by former Liberal MP Ruby Dhalla in 2009 to make Old Age Security for recent immigrants more accessible.

Ms. Dhalla’s proposal proved so controversial that even her Liberal colleagues disowned it during the 2011 federal election with a dismissive “that’s not going to happen.” Myself, I think the case for restricting Old Age Security to long-resident Canadians deserves some closer examination before we completely dismiss it.

First, let’s review the Old Age Security residency rules.Any Canadian or legal resident age 65 or more who is living in Canada may apply. If residence in Canada over the lifetime is less than 10 years, the person is ineligible. If residence is between 10 and 39 years, a fractional pension is paid. Over 40 years, and the person is eligible for a full pension. Ms. Dhalla’s proposal was to shift the minimum requirement to three years. While I haven’t seen the text of Ms. Davies’s now-withdrawn motion,press reports indicate it would also support the liberalization of the 10 year residence rule.

The argument for a residency requirement for retirement benefits is strongest with an explicit dedicated payroll tax. For example, Canada Pension Plan contributionsappear as a separate line item on pay stubs and the funds flow into an autonomous fund. The benefit formula depends on the same lifetime earnings that were taxed for the earlier contributions. This strong tie between tax and benefit likely explains why no calls have been made for special treatment for short-term residents under the Canada Pension Plan.

The Old Age Security pension is different. When Old Age Security was introduced in 1952, it was funded by a three-pronged tax: two per cent each on personal income, corporate profits, and a sales tax. This continued (with ever-increasing tax rates) until 1972, when these three taxes were removed and rolled into the income tax system and other excise taxes. This move followed the advice of the Royal Commission on Taxation that the Old Age Pension should be financed out of general revenues since benefits did not depend on the amount of taxes that were paid and were complicated to collect.

So, we had twenty years of contributory Old Age Security taxes — but that ended 40 years ago. Assuming work started at age 18, this means no one under age 58 today has ever paid any explicit Old Age Security taxes — and those over age 58 paid explicit taxes only for a fraction of their working lives. Moreover, the proportion of people who never paid the explicit tax will only grow in the future as younger generations reach age 65 with increasingly less work exposure to the 1952-1971 window. This renders the argument about a tax-benefit linkage much weaker for Old Age Security than for the Canada Pension Plan.

A refinement of the argument posits implicit linkages between a lifetime of paying taxes into general revenues and the pension benefits that flow at older ages. This argument seems sound in general, but I find it hard to distinguish why we should impose residency requirements on Old Age Security but not other public benefits or public spending. Why restrict Old Age Security to long-term residents but not public health insurance? What makes Old Age Security so different?

I suspect the public mood against these Old Age Security pension extension proposals stems from a sense that the existing fiscal ‘deal’ for short-term residents is already generous enough and needs no improvement. That’s certainly defensible, but as the short twenty-year span of contributory Old Age Security taxes fades from fiscal memory, the argument for excluding short-term residents from the benefits received by other Canadian seniors will become harder to make.

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

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2 Comments

  1. I feel the current process for qualification of Old Age Security is fair in many aspects, but does cater to those who are long-term residents of the country. The proposed revision to lessen the length of time in which immigrants can qualify for the same benefits completely undermines the fact that long term residents have been paying into a retirement plan for their working lives. These ‘recent arrivals’, as stated in the article, should, as currently stands, get the amount of money that is proportional to the time in which they have been in the country. By stating this, this further defends the point that the current system is beneficial. However, in agreement with Milligan, I do believe that the same attitude should not be supported with respect to Health Care. Every citizen, in every country, should have access and be eligible to sufficient means of health services (e.g. Universal Health Care). This is important regardless of citizenship status and/or income. Health Care and Old Age Security can go hand in hand, however there are processes in place in the old age sector that are there to guarantee the security of citizens of the country that have been contributing to the country’s economy for many years.

    To change the policy to the proposed three years would be unfair to the long term citizens of the country and would be an incentive for more people to come to the country. This incentive may cause such an influx in people to the country that it may actually be detrimental to the countries economy. If this law were to take place, the long term residences of Canada would be paying, through their many fees and taxes, for these immigrants to have Old Age Security. These ‘recent arrivals’ have not paid into many years of taxes, as permanent residencies have, so qualification for this benefit after only three years of paying into Old Age Security is morally wrong. Millions of dollars, paid by Canadians, would essentially be given to these immigrants to help maintain their senior lives, while they have not invested into this fund. The justification for this three year proposal is absolutely absurd, as the immigrants would be receiving the same amount of Old Age Security as those who have invested into this benefit for years on end. I feel if this law was put in place, many senior migrants would relocate to Canada to take advantage of this Old Age Security benefit. As many countries do not have this assistance, especially with such easy access, the draw to Canada would be much greater. Although the need for constant immigration and emigration to and from a country is necessary, with financial security for the older population a guarantee, this may cause an unsustainable increase in immigration. This would cause many issues for long term residencies, as taxes would have to be raised to be able to support all the new immigrants who relocate to Canada.

  2. Christianne O'Brien

    In reading this article many aspects come to mind when looking at the OAS and the requirements entailed. As stated in the article Liberal MP Ruby Dhalla was attempting to implement Bill C 428 which would change the 10 year residency to only 3 years. In which immigrants coming to Canada can apply and be eligible for OAS sooner. This I can somewhat agree with to help reduce the number of seniors in poverty. As a Canadian and as a future Social worker I want to be able to help, to provide social services so that everyone can benefit. However I also think just because it “sounds nice”, does not always work out as intended. I believe that long-term implications need to be closely looked at before considering any changes. A residual approach would perceive this as the family should be responsible and that that is “our money” we worked hard and pay taxes so we are entitled to those benefits. I’m sure many conservatives would believe that this would be outrageous to even consider. Although what about those who were born and raised in Canada never worked a day in their life and are 65, should they still qualify? How can we determine what is fair? There are many perspectives and scenarios as Canadians and immigrants that we need to consider. I think people are afraid and may not fully understand. It all comes down to money and people wondering if there’s enough to go around.

    I believe that our 10 year residency requirement is reasonable, not just for Canadians but for immigrants as well. Reducing poverty not only for seniors but for all is immense. Government spending on income security is approximately 45% that is a huge chunk going towards our Canadian Pension Plan and Old Age Security. So why would we need to reinstate a new bill? If any changes should be made I don’t believe this to be priority.

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