September 1998

Lessons from Cancelled
Seniors Benefit Legislation

© Talbot Stevens

With the Seniors Benefit now cancelled, it makes sense to recognize the many lessons from this legislation. Some lessons can benefit us now, and others will help us better understand the impact of future efforts to claw back government benefits.

My study of the Seniors Benefit (SB) legislation, commissioned by Strategic Value Corporation, verified that the cancellation is a victory for Canadian investors.

Although it took the public several years to recognize the problems with the Seniors Benefit, the final lesson is that nothing is written in stone and with enough public pressure, things can change.

Other lessons include the following.

Lesson: Clawing back government benefits is a “hidden” form of raising tax rates. Under the SB, the tax rates for most middle-income seniors effectively would have increased 50 to 74%.

The loss or clawing back of a tax-free government income means that the net benefit from earning other sources of income drops by the same rate. Someone in a 40% tax bracket, facing the 20% SB clawback, essentially nets 40¢ dollars from earning extra income. This is the same as being in a 60% tax bracket — a 50% increase.

Lesson: Diversify by strategy. Most Canadians have the majority, if not all, of their voluntary retirement savings in one, single strategy — RRSPs. The 20% SB clawback would have meant a drop in after-tax RRSP income of 27 to 40%. Is it safe to have all of your voluntary savings in any single strategy?

The most important message I've given to the public and financial advisors over the last two years is the critical, overlooked importance of diversifying by strategy. Some money should be in RRSPs, some unsheltered, and perhaps some leveraged conservatively.

Lesson: Evaluate retirement strategies by their ability to produce after-tax, after-clawback income. The increase in tax rates due to clawbacks forces us to rethink how retirement strategies are analyzed. If your financial goal is saving for retirement, then the only thing that matters is how much after-tax income an investment approach produces from the day you retire until death.

Lesson: The RRSP Refund Strategy, what you do with your RRSP refund, has a critical impact on the size of your RRSP retirement fund. The last two Strategy Sheets outlined five RRSP Refund Strategies, each of which produce different levels of after-tax retirement income.

Lesson: There is a minimum holding period for RRSPs. Based on a number of key parameters including the Refund Strategy used, my research identified for the first time that there is a minimum holding period needed for RRSPs to produce more after-tax retirement income than unregistered investments.

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