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Should recent arrivals qualify for Old Age Security?

The public mood against the Old Age Security pension extension proposals most likely stems from a sense that the existing fiscal ‘deal’ for short-term residents is already generous enough and needs no improvement.

SHAUN BEST/Shaun Best/Reuters

Kevin Milligan is Associate Professor of Economics at the University of British Columbia

How much fiscal benefit should Canadians with only a short history of residence in Canada receive? Earlier this week, the NDP withdrew a Private Members' Motion originally submitted by Vancouver East MP Libby Davies on this controversial topic. The NDP motion echoed a previous proposal by former Liberal MP Ruby Dhalla in 2009 to make Old Age Security for recent immigrants more accessible.

Ms. Dhalla's proposal proved so controversial that even her Liberal colleagues disowned it during the 2011 federal election with a dismissive "that's not going to happen." Myself, I think the case for restricting Old Age Security to long-resident Canadians deserves some closer examination before we completely dismiss it.

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First, let's review the Old Age Security residency rules. Any Canadian or legal resident age 65 or more who is living in Canada may apply. If residence in Canada over the lifetime is less than 10 years, the person is ineligible. If residence is between 10 and 39 years, a fractional pension is paid. Over 40 years, and the person is eligible for a full pension. Ms. Dhalla's proposal was to shift the minimum requirement to three years. While I haven't seen the text of Ms. Davies's now-withdrawn motion, press reports indicate it would also support the liberalization of the 10 year residence rule.

The argument for a residency requirement for retirement benefits is strongest with an explicit dedicated payroll tax. For example, Canada Pension Plan contributions appear as a separate line item on pay stubs and the funds flow into an autonomous fund. The benefit formula depends on the same lifetime earnings that were taxed for the earlier contributions. This strong tie between tax and benefit likely explains why no calls have been made for special treatment for short-term residents under the Canada Pension Plan.

The Old Age Security pension is different. When Old Age Security was introduced in 1952, it was funded by a three-pronged tax: two per cent each on personal income, corporate profits, and a sales tax. This continued (with ever-increasing tax rates) until 1972, when these three taxes were removed and rolled into the income tax system and other excise taxes. This move followed the advice of the Royal Commission on Taxation that the Old Age Pension should be financed out of general revenues since benefits did not depend on the amount of taxes that were paid and were complicated to collect.

So, we had twenty years of contributory Old Age Security taxes -- but that ended 40 years ago. Assuming work started at age 18, this means no one under age 58 today has ever paid any explicit Old Age Security taxes -- and those over age 58 paid explicit taxes only for a fraction of their working lives. Moreover, the proportion of people who never paid the explicit tax will only grow in the future as younger generations reach age 65 with increasingly less work exposure to the 1952-1971 window. This renders the argument about a tax-benefit linkage much weaker for Old Age Security than for the Canada Pension Plan.

A refinement of the argument posits implicit linkages between a lifetime of paying taxes into general revenues and the pension benefits that flow at older ages. This argument seems sound in general, but I find it hard to distinguish why we should impose residency requirements on Old Age Security but not other public benefits or public spending. Why restrict Old Age Security to long-term residents but not public health insurance? What makes Old Age Security so different?

I suspect the public mood against these Old Age Security pension extension proposals stems from a sense that the existing fiscal 'deal' for short-term residents is already generous enough and needs no improvement. That's certainly defensible, but as the short twenty-year span of contributory Old Age Security taxes fades from fiscal memory, the argument for excluding short-term residents from the benefits received by other Canadian seniors will become harder to make.

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About the Author

Kevin Milligan is Associate Professor of Economics at the University of British Columbia. He is also a Research Fellow with the C.D. Howe Institute and a Research Associate of the National Bureau of Economic Research. More

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