An introduction from Anthony Quinn, President of CARP

At CARP, we believe older Canadians who choose to remain in the workforce should be encouraged — not penalized — for continuing to contribute to their families, communities, and our economy. Yet, too many seniors find that earning or withdrawing a little extra income can actually leave them worse off, once taxes and benefit clawbacks take hold.

A recent report from the C.D. Howe Institute, The Clawback Trap: How Canada’s Benefit System Can Undermine Work and Saving, shines a bright light on this problem. It’s an issue that cuts to the heart of CARP’s advocacy for financial security, fairness, and independence for older adults. We’ve invited the report’s co-author, Alexandre Laurin, to explain his findings and to show why this matters to all Canadians — especially those who wish to keep working or saving past traditional retirement age.

A Message from Alexandre Laurin, C.D. Howe Institute

Co-Author of The Clawback Trap: How Canada’s Benefit System Can Undermine Work and Saving (with Nicholas Dahir)

Across Canada, more older adults are staying in the workforce longer — not only because they need the income, but because they enjoy contributing, staying active, and sharing their skills. Yet too often, our tax and benefit system discourages them from doing so.

Imagine a 68-year-old retiree who takes a part-time job earning $30,000 in a year. They expect it will make life easier — perhaps helping with groceries, medication, or travel to see family. But at tax time, they discover that about half of that income has effectively disappeared between income taxes and clawbacks to the Guaranteed Income Supplement (GIS) and other benefits. Or consider another 68-year-old earning $10,000 who decides to work more to earn an additional $15,000: after taxes and benefit reductions, they would keep less than 40 percent of their additional income.

Or picture an older Canadian who withdraws a modest amount from their RRSP to cover higher living costs, only to find their GIS benefit drops sharply the following year. What seemed like a prudent use of savings turns out not to help much. Our research shows that many seniors face marginal effective tax rates (METRs) — the share of each extra dollar lost to taxes and benefit reductions — ranging between 50 and 95 percent on income up to about $22,000. At very low income levels, a retiree may keep less than 25 cents of every extra dollar earned.

These examples are not unusual. We estimate that more than 40 percent of seniors face a METR greater than 50 percent on their next dollar of pension or registered savings withdrawals. For seniors looking to earn income from employment, about 20 percent would lose more than half of what they earn if they take a job.

This system creates powerful disincentives. When working a few extra hours, drawing modest savings, or delaying retirement results in losing most of what’s gained, it discourages participation and saving. That hurts low-income individuals striving to remain self-reliant — and it hurts Canada. With an aging population and a declining birth rate, we need policies that make it easier, not harder, for older adults to stay in the labour force if they choose.

Government benefits are aimed at reducing poverty, and their income-tested clawbacks are meant to reduce their fiscal cost. So there are no easy solutions to this problem. Still, when making policy changes, governments should consider the combined impact of income tax, payroll contributions, and benefit clawbacks to ensure the total burden does not discourage work or saving. And for seniors whose earnings fluctuate due to part-time work or phased retirement, they could be allowed to spread income over multiple years to avoid sudden clawbacks triggered by a single higher-income year.

Above all, reducing the punishing effective tax faced by low-income seniors would make it more rewarding to stay active in the workforce and encourage greater use of tax-deferred savings vehicles during working years.

I invite you to read and share our full report which can be found here:  https://cdhowe.org/publication/the-clawback-trap-how-canadas-benefit-system-can-undermine-work-and-saving/