Old Age Security Reform Is A Good Idea; Arbitrary Clawbacks Are Not

My Shih Tzu bichon, Enzo, loves to wander. He’ll find any opportunity to take off, requiring me to chase after him. We’ve even had to install a GPS-enabled wireless fence., which keeps Enzo in but not because he wants to.

Many governments are increasingly taking a similar approach to their tax systems. In a world where capital and people are more mobile than ever, the instinctive response is to build fences, making it harder for taxpayers to leave once they’re in the system.

For example, Australia in 2023 consulted on changes to its tax residency rules, including a more mechanical 183-day test and additional tests based on family ties, accommodation and economic connections.

The proposals would also make it more difficult to cease residency , including shorter day-count thresholds and multi-year tests required before a taxpayer can fully exit the system. This policy direction has been described by some as creating a more “adhesive residency,” making it easier to enter the tax net than to leave it. Or, as I often say, it’s much easier to get married than divorced.

The Australia proposals appear to have stalled, but the instinct to trap rather than attract is misguided. Good tax policy should not be about building residency fences; it should be about giving people reasons to stay.

I’ve seen a dramatic increase in successful Canadians exploring the idea of or leaving the country over the past decade. The wealth attached to those departures is measured in the tens of billions of dollars. The result is a steady outflow of capital, talent and future tax revenues .

Some say those who leave somehow owe more to Canada because of the opportunities they benefited from, thereby confusing gratitude with obligation. Those individuals have already paid dearly through taxes , risks and contributions, so it’s not a moral failure when they leave; it’s a response to incentives.

Few leave Canada lightly. Lifestyle and family come first, but tax still matters — pretending otherwise is naive.

High tax rates, complexity, policy uncertainty , persistent rhetoric about taxing the rich and other redistributive policies all contribute to an environment where successful and mobile individuals begin to ask a simple question: would I be better off elsewhere?

This same mindset — seeing prosperity as a source to be tapped rather than cultivated — is creeping into other parts of our fiscal conversation, including Old Age Security ( OAS ). That’s why some of the recent commentary about reforming OAS should be approached with caution.

A recent poll commissioned by Generation Squeeze (the same activist group that thinks a home equity tax is a good idea) said roughly three-quarters of Canadians support cutting OAS for seniors earning more than $100,000 per year, with purported annual savings to Canada of roughly $7 billion. They used an example of a senior couple collectively earning $180,000 still receiving OAS to suggest it is inappropriate.

But polling results are highly sensitive to how questions are framed. Ask whether benefits should go to those who “need them most” and you’ll always get strong support. But that’s not the real question. The issue is whether Canada should further penalize individuals who spent decades saving for their retirement.

Some other details get glossed over, too. First, the current system already includes a meaningful clawback. For the current recovery period, OAS begins to be reduced at a 15 per cent rate for net income that exceeds $90,997 and is fully eliminated at $148,451 for seniors aged 65 to 74.

In other words, some seniors are already receiving reduced or no benefits. The $180,000 example cited by Generation Squeeze is not coincidental; they said the current clawback threshold (approximately $90,000 times two) is too high while offering little support for why $100,000 in total is better.

Second, $100,000 of income — particularly for a household — is not rich in much of Canada. For many retirees, that level of income reflects discipline and long-term planning, not excess. Many seniors also support children and grandchildren facing serious affordability challenges.

Third, OAS was never intended to be narrowly targeted, but to be broadly available. It includes clawbacks, but turning it into an ever more aggressive means-tested program would fundamentally change its nature while increasing effective tax rates on those who did exactly what public policy has long encouraged: save.

Fourth, the supposed billions in savings rely heavily on static assumptions. Behaviour changes will happen, income can be deferred, split or restructured, so serious policy changes need to account for that.

I am not opposed to sensible OAS reform . It is an incredibly expensive program and will continue to grow as Canada’s population ages. Measures to improve its fiscal sustainability should absolutely be considered.

There is precedent for thoughtful reform. Brian Mulroney government’s 1985 attempt to erode benefits through de-indexing was derailed by a fierce grassroots backlash . But it did implement clawbacks in 1989.

In the 2012 budget, Stephen Harper’s government proposed increasing the eligibility age from 65 to 67, but it was never implemented when the Liberals took office in 2015. Thoughtful reform should happen, but not through simplistic, redistribution-driven proposals built on questionable assumptions.

Broadly, this kind of thinking reflects a growing tendency to focus on how to extract more from those who are perceived to have enough rather than how to create an environment where more people can succeed.

Capital is remarkably agnostic. It goes where it is treated well and is welcome. The better approach for Canada is obvious, even if politically difficult: competitive tax policy, a strive for simplicity, stability and a genuine focus on growth. In other words, make people want to stay.

Putting up fences might keep Enzo in, but it doesn’t make him want to stay. Tax and economic policy should aim for the latter.

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Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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