Budget enhances financial security for older adults and establishes foundation for national pharmacare
Yesterday, the federal government dropped the final budget of their current mandate with big promises for older Canadians. With an election on the horizon in 7 months, seniors - the strongest voting demographic - have their issues firmly on the table. The budget includes investments to improve financial security, protect workplace pensions, and empower seniors to live independent, active and engaged lives, as detailed in the NIA’s National Seniors’ Strategy. We identified important enhancements to retirement security and pension benefits, support for local seniors’ programs, movement on the National Dementia Strategy and positive developments in the effort to establish national pharmacare.
1. Allowing Workplace Defined Contribution Plans to Offer Better Pension Options
Last year, the NIA along with a coalition of pension and seniors advocates including ACPM, CARP, the CIA, CLHIA, Common Wealth, PIAC, and notable pension expert, Keith Ambachtsheer, called on the government to improve the retirement income options available to retiring Canadians in defined contribution pension plans.
In a letter to the federal government, we identified that employer or other group-sponsored collective solutions with defined contribution pensions and other registered savings vehicles are blocked from setting up variable payout life annuity-type group arrangements for their employees. We urged the government to amend the income tax regulations that prevent the creation of new collective variable payout programs that allow pension plans to pool the assets of their retired DC members – providing economies of scale, better investment management and longevity risk protection.
We also identified that the Income Tax Act (ITA) prevents individuals from purchasing a deferred life annuity with their registered savings with a benefit commencement date beyond age 71. We recommended amending the ITA so that that the maximum allowable commencement age for a deferred life annuity shifts from 71 to age 85. This would allow individuals to cost-effectively mitigate their longevity risk, while leaving the bulk of retirement savings to manage flexibly during the earlier part of retirement.
The federal budget proposes permitting additional types of annuities under Registered Plans, providing flexibility in managing retirement savings. The two new types of annuities being permitted are advanced life deferred annuities and variable life payment annuities.
Advanced Life Deferred Annuities
This type of annuity will be permitted under a under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit-sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP). Tax rules require an annuity purchased with registered funds to commence at the end of the year the recipient turns 71. The changes made by the federal government will allow the commencement to be deferred until age 85.
Variable Payment Annuity
Variable payment life annuities will be permitted under a PRPP and defined contribution RPP.
Tax rules require that retirement benefits from a PRPP or defined contribution RPP be provided to a member through transfer of funds from the member’s account to a RRIF of the member, or an annuity purchased from a licensed annuities provider. However, in-plan annuities (annuities provided to members directly from a PRPP or defined contribution RPP) are generally not permitted under the current tax rules. The Budget amends the tax rules to permit PRPPs and defined contribution RPPs to provide a variable payment life annuity (VPLA) to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.
Both of these measures will come into effect in 2020 and subsequent taxation years.
The NIA’s Direction of Financial Security Research, Dr. Bonnie Jeanne MacDonald believes, “These measures offer a safer way to turn hard-earned retirement savings into lifetime pensions. At the end of the day, such pensions deliver more secure, predictable income for life - improving seniors’ financial independence and peace of mind."
The Value of a Good Pension, a recent report by HOOPP, Common Wealth, and the NIA, shows that good pensions create value for money for Canadians through five key value drivers: 1. Saving 2. Fees and costs 3. Investment discipline 4. Fiduciary governance 5. Risk pooling.
Canadians with defined benefit pensions derive value from all five of these drivers. Now, with the changes proposed in Budget 2019, Canadians with other registered plan, including defined contribution plans, can get closer to the financial security offered by DB pensions by risk pooling and longevity protection.
“Academic research strongly supports the merits of buying insurance against outliving one’s money in retirement,” said NIA Senior Fellow Keith Ambachtsheer. “Tax law placed significant restrictions on being able to purchase this insurance cost-effectively in Canada. Budget 2019 removed these restrictions.”
In 2016, seniors aged 85 and older made up 2.2% (or over 770,000) of the population; by 2031 as the oldest boomers reach 85 this cohort is set to increase to 4% (or over 1.25 million) and by 2051 as the youngest boomers reach this milestone it is set to increase to 5.7% (or about 2.7 million). This clear demographic trend identified in the research shows that Canadians are at risk of outliving their money and require a range of income options to address longevity. The budget took a significant step forward in addressing the concerns of these Canadians.
2. Enhancing the Guaranteed Income Supplement (GIS) Earnings Exemption
Leading up to the last federal election, the Alliance for a National Seniors Strategy, advocated for enhancements to existing seniors’ income programs. Given that the government has previously increased the GIS benefit, yesterday’s announcement will make the GIS even more effective by enhancing the earning exemption for Canadians.
What are the changes?
Beginning in July 2020-21, this budget allows low income earners to keep more of their hard-earned money by extending the eligibility for the earnings exemption to self-employment income and providing a full or partial exemption on up to $15,000 of annual employment and self-employment for each GIS or Allowance recipient and their spouse.
The GIS earnings exemption currently allows low-income seniors and their spouses to each earn up to $3,500 per year in employment income without triggering a reduction in GIS or Allowance benefits. This will be increased to $5000 per year and the government will be introducing a partial exemption of 50 per cent, to apply to up to $10,000 of annual employment and self-employment income beyond the initial $5,000 for each GIS or Allowance recipient as well as their spouse. The increased earnings exemption has long been identified as a way of helping low-income seniors who may need to supplement their OAS and GIS with additional income. Simply put, this change removes barriers for low-income seniors who need to supplement their income with work and keep more of their GIS.
3. Ensuring seniors receive their pensions
In addition to the enhancement to the GIS, the budget proposes to proactively auto-enroll into the CPP Canadians who are 70 years or older in 2020 but who have not yet applied to receive their pension. The NIA is pleased to see the budget move to help seniors receive the full value of their CPP by proactively enrolling CPP contributors.
It is estimated that around 40,000 individuals over the age of 70 are currently missing out on their pension earnings and would gain access to monthly retirement pension as a result of this change. As Bonnie-Jeanne MacDonald’s research shows, delaying CPP to age 70 means a considerably higher lifetime pension. Getting it automatically, and at 70, could prove to be an unexpected windfall for Canadians who have otherwise neglected to begin taking their CPP benefits. This is an important measure that ensures more Canadians have access to retirement savings and the full value of benefits that they paid into during their working years.
4. Enhancing security of workplace pensions
The NIA has always been a strong advocate for the protection of pensions through our National Seniors Strategy. Recently, there have been a number of high-profile cases of companies in insolvency, jeopardizing the pensions of their employees and retirees. This is why the plan to introduce new measures to enhance work place pension security in the event of insolvency is important. With defined benefit pensions being one of the stronger retirements saving vehicles for Canadians, the NIA supports the federal government’s efforts to protect the lifesaving of pensioners by making insolvency proceedings fairer, increasing oversight, and strengthening legislation.
5. Empowering seniors to live independent, active, engaged lives
In 2016, through the campaign for a National Seniors Strategy the NIA advocated that the federal government introduce measures to combat social isolation among older adults. They responded by introducing the New Horizons fund. Budget 2019 announced an additional $100 million over 5 years for the New Horizons fund. This supports for profit and not for profit organizations’ local community projects promoting social participation, mentoring and volunteering to mitigate social isolation. This much needed support to local organizations is welcomed and will have a positive impact in communities across the country.
6. Establishing the foundation of a national pharmacare program
The NIA welcomes the announcements to advance the movement towards national pharmacare in Canada. Improved access to medically appropriate medication has been a key plank in our National Seniors Strategy and to see these policies finally coming to fruition is encouraging. We agree with steps taken so far - a national formulary is critical to ensuring that all Canadians have access to a common list of drugs at a common price and a national agency will be required to coordinate amongst provinces. We have long advocated for the core principle of the elimination of financial barriers to access to prescription medication. NIA research shows deductibles and co-pays consistently lead to reduced use of prescription medications. In order to have proper access and adherence, our national pharmacare program must be created without financial barriers. Establishing national pharmacare won’t be easy or inexpensive. The NIA will seek to inform government action on pharmacare and will closely follow this file as it develops.
7. Movement towards a National Dementia Strategy
The NIA has long supported the call for a National Dementia Strategy and is pleased to see funding allocated to support the implementation of Canada’s First National Dementia Strategy. In fact, Dr. Samir Sinha, the NIA’s Director of Health Policy Research, is a member of the Federal Ministerial Advisory Board on the dementia strategy.
The budget allocates $50M to the Public Health Agency of Canada over the next 5 years. The funding will be used to increase awareness about dementia, develop treatment guidelines and best practices for early diagnosis, and improving our understanding of the prevalence of dementia. Dr. Samir Sinha, welcomes this announcement. “As a Member of the Federal Ministerial Advisory Board on Dementia, I am thrilled that the federal government is making a landmark investment to support the establishment of Canada’s first National Dementia Strategy,” said Dr. Sinha. “As a major threat to ageing well in our society, this money for dementia will help raise awareness, support prevention and treatment of this disease.”
Today’s budget builds on many recommendations put forward by the NIA and the National Seniors Strategy ensuring that seniors can lead independent, productive, healthy and active lives through increased financial independence and access to healthcare, and services. While there are many milestones to celebrate, these are only first steps to substantially altering the way we deliver the wide range of services seniors require to maintain a good standard of living, health and independence as they age. The reality remains, that the array of policies relation to older adults represents a patch work of ideas without clear collective goals and targets. These policies are housed in bureaucratic silos and need to be brought together in the form of a National Seniors Strategy to better target public dollars and increase effectiveness in the system to provide better care. Through the adoption of a National Seniors Strategy, the federal level of government could be the driver of collaborative leadership to direct a coordinated effort with clearly defined goals to create sustainable progress on issues related to ageing in Canada.
The National Institute Ageing (NIA) is a think tank focused on meeting the realities of Canada’s ageing population. We are Canada’s only think tank dedicated to policy solutions at the intersections of healthcare, financial security, and social well-being in relation to ageing. With the backing of Ryerson University and our industry partners we work across private and public sectors providing solutions that promote the evolution and sustainability of Canadian systems and programs. Our mission is to make Canada the best place to grow up and grow old. To learn more about the NIA visit our website at http://www.ryerson.ca/nia and follow us on Twitter @RyersonNIA
By Michael Nicin, Executive Director and Arianne Persaud, Manager of Advocacy, Government Relations and Stakeholders |National Institute on Ageing | email@example.com | firstname.lastname@example.org