The Observer

ARTICLES OF INTEREST

GIS. Could it cause your pension plan members to hate you?

by Dominique Roelants, BC Nurses’ Union

According to the Chief Actuary of the Canada Pension Plan, CPP enhancements will decrease reliance on GIS – which is a good thing, but it makes one wonder what the impact is of workplace pensions. Many workplace pension plans ultimately offer a fairly limited pension benefit – for instance more than half of the pensions currently being paid by the BC Municipal Pension Plan are under $1,050 per month[1]. With others, the benefit might start off looking pretty good, but over time decline in value due to the effects of inflation. As a result, given the Guaranteed Income Supplement claw back, many retirees may now be wishing they had a better income during their working lives and no workplace pension plan.

Take the example of Bob. His job involved hard physical labour and he just couldn’t keep going. He had saved some additional money in RRSPs and so when he retired twenty years ago with a defined benefit pension plan that paid him around $800 per month he thought he would be OK. He then took his CPP at 60, so it was much lower -  about 500 per month.  He knew that when he started drawing Old Age Security (OAS), he would be getting a total of about $1,800 per month from all sources
[2]. He owned his own home and he would still have some RRSPs left as well so he thought all was good. 

Unfortunately, since retiring, Bob has spent the entirety of his RRSP savings (and the two market crashes did not help). Fortunately for Bob, his CPP has kept up with inflation and is now about $700 per month. Sadly, his workplace pension is still $800 per month and as a result, this year, Bob became eligible for GIS. Because of that, Bob learned the rules of the GIS claw-back. For each dollar he gets from his pension plan – he is losing just over 70 cents, 50 cents clawed back from GIS and slightly over 20
[3] cents in income tax. In effect, Bob has a marginal tax rate of over 70%, 20% more than the marginal tax rate paid by people earning over a million dollars a year.

If Bob’s employer had not signed him up for a pension plan, Bob could be getting over $400 per month in GIS – tax free, but because of his pension income, his monthly GIS is just a few dollars. As it is, for all the money he saved in his workplace pension, for the lower standard of living he experienced during his working years, he is only about $250 per month better off than if his employer didn’t sponsor a pension plan
[4].

What did Bob learn at age 80 – don’t save for retirement. The existence of the GIS claw back is a strong disincentive for lower income working Canadians to participate in a registered pension plan or contribute to an RRSP. The existence of the GIS claw-back suggests that our industry might be doing a disservice for those people with pension plans in low paid jobs.

But saving for retirement should be a good idea for everyone. The fact that it may not be means the system is broken. In order to make pension plans beneficial for lower paid working Canadians, their effective marginal tax rate in their senior years must be dramatically lower than the current 70%. That can be achieved by eliminating (or significantly reducing) the GIS claw back and making GIS taxable (as it is with OAS). Even if the Government was not prepared to eliminate the GIS claw back, if they reduced it to the 15% claw-back applied to OAS, then at least the marginal tax rate for the lowest income seniors won’t be higher than the rate paid by the richest Canadians, as it is now.

I submit that the best way to decrease the disincentives for retirement saving is to eliminate the GIS claw-back, but if we as an industry cannot convince the government to eliminate the claw-back, then we ought to be designing a new form of pension plan that makes sense for lower income Canadians. It could be based on the tax free savings accounts. Such a “pension” would not be taxable and the lower income Canadians with a “pension plan” could still be eligible for GIS. That would eliminate the disincentive to save for retirement.

 
[1] 2017 Annual Report, and note that $1,050 is the equivalent of $715 per month in 1998.
[2] His workplace pension, CPP and OAS – but Bob never thought about GIS and was not eligible for GIS in 2003 because his income was too big
[3] The marginal tax rate in BC for a person earning $18,000 per year is 20.06%, in Quebec, the marginal tax rate would be 30%
[4] The effect for Bob is that of the $800 he gets in workplace pension, he gets to keep less than $240 – about $400 gets taken because of the GIS claw-back and he pays just over $160 in income tax.


Dominique Roelants served as a member of the BC College Pension Board for 13 years, 4 as chair. From 2014 to 2018, he worked as Executive Officer of the BC College, Public Service and Teachers’ Pension Boards. He is a Director of Coastal Community Credit Union. Dominique has recently taken a position as Manager, Legal Services for the BC Nurses’ Union.