Negative Effects of the Canadian GIS Clawback and Possible Mitigating Alternatives

In Canada, there are three main sources of government-provided retirement income: the Canada/Quebec Pension Plans (C/QPP), which have benefits and contributions based on earnings up to the Yearly Maximum Pensionable Earnings; Old Age Security (OAS), which is a fixed amount for most but does include a ‘clawback’ of benefits for high-income individuals; and the Guaranteed Income Supplement (GIS), which is designed to supplement those with extremely low income. The annual GIS benefit is reduced, or clawed back, by 50 cents for every dollar of annual income the person has in retirement, including C/QPP and income from Registered Retirement Savings Plans (RRSPs) and other savings. OAS benefits are not included in determining the GIS clawback. The result of this is that low-income individuals who attempt to enhance their retirement replacement ratio actually see a decrease in government-provided support the more they save for retirement. In fact, savings in an RRSP can effectively be taxed at more than 100% through corresponding reductions in the GIS, social housing, home care, GAINS (Ontario's Guaranteed Annual Income Supplement), and other benefits which are based on one's personal retirement income. This paper explores alternatives to the 50% GIS clawback, including: a basic GIS exemption, a GIS clawback rate lower than 50%, and a combination of the two. The goal is to improve the fairness of the GIS and reduce the disincentive to save for retirement, without increasing the overall cost of the program significantly.