The 1995 Budget took another step toward a fully income-tested oldage pension. Starting in July 1996, the clawback on Old Age Security isapplied before cheques are sent out to seniors, on the basis of lastyear’s income, ratherthan after they fill in their tax return as was previously the case.
b. One victory for theuniversalists: The failure of the Seniors Benefit
In 1993, the Caledon Institute proposed a radical restructuring offederal elderly benefits. The proposal would replace the five existingprograms Old AgeSecurity, the Guaranteed Income Supplement, the Spouse’s Allowance, and the pension andage credits with asingle, family income-tested program for low- and middle-incomeseniors.
Caledon put forward two major arguments for its proposal.These arguments focussed upon sustainability and equity.
Old Age Security costs are thesingle most important cause of rising social spending in Canada. Thecountry has a rapidly aging population. It is exerting upward pressure onpublic and private expenditures on pensions, health care and socialservices. Reform of old age pensions is essential if Canada is tomaintain an adequate level of basic income support for the rising number oflow-income seniors in the decades to come.
Caledon’s other argument was directed at the unfairness of the existingelderly benefits system. The five current programs present an irrationalarray of income tests.
Old Age Security and the age credit areincome-tested on an individual basis. The pension income credit isincome-tested on an individual basis. It is not available to people withprivate pension income who are below the taxpaying threshold, though relativelyfew would fall in this category. But the Guaranteed Income Supplement andSpouse’s Allowanceare income-tested on the combined income of both spouses i.e., family as opposed toindividual income.
The result of these mixed income tests is that elderly coupleswith the same income can receive different amounts of elderly benefits,depending on each spouse’s share of family income. Throughout most of the incomerange, what can be termed ‘two-income couples’ receive more benefits than do ‘one-income couples.’
One-income couples have the advantage over two-income couples atthe low and high ends of the income spectrum. In the extreme case, anelderly spouse with little or no income other than Old Age Security, but livingwith a wealthy spouse, could receive the maximum Old Age Security (paying noincome tax and not subject to the income test). By contrast, elderlysingle people or couples with even quite modest incomes end up with lessafter-tax Old Age Security because they are in taxpaying range and must pay taxon their Old Age Security benefits.
The federal government adopted Caledon’s idea and called its proposednew program the Seniors Benefit. It was structured as a two-tierstructure with two benefit components and two reduction rates (i.e., theGuaranteed Income Supplement component on top of Old Age Security, withreduction rates of 50 and 20 percent, respectively). The two tax benefitswere eliminated and their funding incorporated into the new system.
The Seniors Benefit’s major reform would have been to create a single, familyincome-tested program. The proposal was designed to ensure thatlow- and middle-income seniors not suffer any loss in income.Neither would current seniors lose because the new benefit included phase-inprovisions.
The Seniors Benefit would have paid the majority of seniors eithermore than or the same as they got under the current system. Three in fourelderly households would have received more or the same.
Elderly households with incomes under$40,000 about theaverage income for couples and more than double the average income for singleseniors at the time would have been better off or no worse off under the newprogram. Some couples in the $40,000-$50,000 income range would havereceived somewhat more and some somewhat less, depending on the income mix ofthe spouses. Couples with income over $45,000 (above the $40,000 averageincome) would have gotten less. Those above $78,000 (almost double theaverage income) no longer would have received elderly benefits.
The proposed Seniors Benefit ran into strong criticism from thoseon both the left and right of the political spectrum. It eventually waswithdrawn in the summer when Parliament was in recess and many media andCanadians on holiday. It was attacked for its family income test and itsalleged damage to incentives for saving for retirement.
In their fight against the Seniors Benefit, women’s groups advanced the‘poor wives with richhusbands’argument. According to this line of reasoning, even in some wealthyfamilies, elderly women have little or no income of their own other than OldAge Security. They are completely dependent on their husbands. TheSeniors Benefit would have removed the only source of income for these poorwives with rich husbands. (The same argument had been used to oppose theabolition of universal Family Allowances, but was dismissed.)
There may be some wives whose wealthy husbands deny themincome. There are no estimates as to how large a problem this is.But the question remains as to why social programs should be seen as an answerto the unequal distribution of income between spouses.
The critics also claimed that the Seniors Benefit was yet anotherattack on universality. Ironically, the reform would have reduced orremoved benefits for only well-off seniors. It would have improvedbenefits for poor and modest-income seniors. So universality won out overfairness in the feminist assault on the Seniors Benefit.
The other major attack on the proposed Seniors Benefit came fromthose on the right. The private pension industry selling individualretirement savings plans argued that the 20 percent reduction rate on the OldAge Security part of the Seniors Benefit would discourage Canadians from savingfor their retirement. (They really meant investing in RegisteredRetirement Savings Plans, since such private pension income would reduce theamount they would get from the Seniors Benefit.)
The notion that middle- and upper-income Canadians wouldimpoverish themselves in old age by not investing in retirement savingsaccounts or occupational pension plans so that they could qualify for a SeniorsBenefit is hard to believe. But the criticism received considerable mediaattention and the political pressure on the federal government from the pensionindustry was strong. Faced with opposition from both left and right, thefederal government withdrew its proposed Seniors Benefit.
The reform of Canada’s income security system can be characterized as a transition froma universalist to a post-welfare model. This model includes a substantialreliance on income-tested income security programs. While this paperfocusses upon income security in particular, social services and education arean equally important part of this evolution.
The many changes described in this paper can be summed up asfollows. Income security reform in Canada over the past decade has soughtto achieve several major goals. First, Employment Insurance and welfare,in particular, have become more ‘active.’ They have incorporated measures to help recipients move offprograms of income support and enter the paid labour market.
Second, income security reform has sought to find ways to makework an attractive option. The National Child Benefit has made asubstantial contribution to this objective by equalizing child benefits betweenworking poor and welfare families and by investing in work-relatedsupports.
Finally, income security reform is intended to reduce poverty inCanada. The introduction of and enhancements to the National ChildBenefit are an important step forward for working households. But whileprogress has been slow and steady, there is still a long way to go on theanti-poverty front.
5. Lessons for the Russian Federation fromthe Reform of Income Security Programs in Canada
The purpose of this follow-up note to ourlong paper is to reflect upon the findings of the research carried out onincome security in Russia and to link these findings to the lessons learnedfrom recent and ongoing income security reform in Canada.
A Note of Caution
Although the Russian Federation and Canada share at least threedefining characteristics -federal systems of government, long cold winters and a passion for hockey- they are unlike in manymore ways. These differences include not only their traditions of socialpolicy, but also the political and economic systems in which social programsoperate. These profound differences must be clearly understood before wecan suggest lessons to our Russian colleagues from Canada’s social policyexperience.
Canada is a liberal parliamentary democracy, organized into astrongly decentralized federation of one central, ten provincial and threeterritorial governments, with a market economy. Government’s role vis-à-vis the economy is mainlythreefold: It makes fiscal and monetary policies; sets various regulatoryframeworks for trade and commerce; and operates a comprehensive network ofsocial programs that are closely connected to the economy in severalways.
Canada’s tax/transfer system plays acrucial redistributive role (both among individuals and provinces) bysubstantially reducing market income inequalities and establishing an incomefloor below which (in theory) no citizen is allowed to fall. Publiclyfunded core health and education systems provide services that are deemed tooimportant for the market to operate on its own (the latter suffers fromefficiency and equality limitations). However, in the case of healthcare, Canada actually has a mixed public/private system (with public financingof core services, but delivery by doctors largely in their roles asself-employed professionals, not public servants). At the same time,employers depend increasingly on social programs to furnish the crucial‘social andintellectual’infrastructure that nourishes economic growth and innovation and enhances anation’sinternational competitiveness.
Yet Canada’s social programs, in turn, aredependent on, linked to and constrained by the market economy. They arefinanced through income, payroll and other taxes that are paid by employees andemployers. The economy clearly affects social expenditures. It setsboth fiscal and ideological limits on the generosity and design of socialprograms. During times of recession, rising expenditures for incomeprograms (especially Employment Insurance and social assistance) contribute togovernment deficits and inevitably provoke calls from the corporate sector andthe political right to reduce spending. Canada’s federal and provincialgovernments have just emerged from several years of both overt and covert cutsto major social programs, as well as tax increases, that were imposed tovanquish the deficit and curb the mounting debt.
The need to make social programs work hand inhand with the labour market is a currently fashionable but, in fact, enduringtheme in Canadian social policy. Throughout our history, there has beenconcern about some social programs creating disincentives to work and attempts(the most recent being the National Child Benefit) to reform social programs sothat they encourage rather than hinder labour force participation.
As noted in our initial paper, the founders of the Canadianwelfare state did not envisage income security programs as a primary orpermanent source of income for the non-elderly population: That shouldremain the role of employment earnings obtained from participation in thelabour force. A full employment economy was posited as the essentialfoundation for an effective and sustainable social security system.
In practice, though, Canada never pursued apolicy of full employment and experienced rising rates of unemployment in thedecades after the Second World War. As a result, income programs became amore important source of income than the nation’s social policy pioneers intended- a fact that critics fromthe right lament at every occasion. Nonetheless, employment remainsCanadians’ majorsource of income, and there are strong cultural norms favouring paid work anddiscouraging reliance on income programs.
All of this is to say that we must be cautious in offering lessonsto Russia from Canadian social policy. The Russian Federation is goingthrough one of the most rapid and profound political and economictransformations in world history. A strong social security system cannotbe built on a weak or turbulent economic and political base. Incomesecurity programs cannot and should not be expected to make up for the lack ofstable employment income for the substantial majority of the population.Reforming social programs to function effectively in and for the emergingpolitical and economic system in the Russian Federation is an enormouschallenge.
However, the problems discussed in the Russia paper are by nomeans unfamiliar to Canada - even if they appear to be much more daunting inRussia’s case thanCanada’s - and in this respect at least Canadianexperience can offer some instruction. Canada has been making significantstructural changes to its income security system in recent years, as detailedin our paper, which in part attempt to deal with the same basic problems thatthe Russian Federation faces.
The key Canadian income security reformtechnique is ‘broadbased income testing’of child and elderly benefits that used to be delivered universally to allfamilies and seniors, regardless of need. Although income support for theelderly is primarily a federal government responsibility, until recently incomesupport for children was divided between the federal and provinciallevels. The current reform increases the federal financial commitment andseeks to shift the share of provincial spending from income benefits forchildren into a wide range of services, which are primarily a provincialresponsibility.
Russia is attempting to simplify andrationalize its complex, categorical collection of income supports andservices. It faces problems financing its social programs, with animbalance between regions’ responsibilities and their fiscal capacity. Its socialbenefits rarely take into account criteria of financial need, which exacerbatesthe financing problem.
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