Why cutting OAS thresholds misses the point—and why wealth matters
Take two couples in their mid-70s. They look identical on paper.
Each report $190,000 in annual income—$95,000 per spouse after pension splitting. Each is subject to a modest Old Age Security clawback.
Both couples appear – in the arithmetic of public debate – to be reasonable candidates for “modernization” where OAS clawbacks would start sooner.
But each pay about $45,000 in income taxes and experience marginal effective tax rates of about 31.5%.
And the clawback on their OAS at 15% increases the marginal effective tax rate on their OAS to 46.5% and decreases their after-tax OAS takeout to 53.5%. On each marginal dollar of OAS, each takes home just 53 and half cents.
But just for a moment, let’s step away from their tax lines and step into their real lives.
Both couples have lived frugal lives and invested safely. Neither accumulated debt except for their mortgages.
Joe and Maude
They have a net worth of $5 million.
- A mortgage-free home
- An inherited cottage from parents who have passed
- No debts
- Good health; and
- Adult children who are financially secure
Their decisions are discretionary:
- when to travel
- how long to stay away
- whether to draw down assets or preserve them
For them, a deeper OAS clawback is an inconvenience.
It trims a vacation, not a life plan. They seem to have leapt out of the pages of the Globe and Mail’s Financial Facelift.
Francine and Ivan
After lives of frugality, they have a net worth of $700,000 including a mortgage free home.
They have the same income as Maude and Joe but they do not have the same life.
A bad fall at home for Ivan changed everything.
- Ivan had to move into long-term care at $80,000 a year including private PSW support
- Francine remains in the family home and is now considering a move to a smaller condo near his care facility
- Their RRIF withdrawals have increased to meet costs. Their marginal effective tax rate goes to 46.5 % when the effects of taxation and the clawback combine.
- Francine’s 97-year-old mother entered memory care five years ago at a different LTC facility that could accommodate her adding another layer of ongoing expense; and
- Their son needs help with his mortgage
What looked like a stable retirement becomes a sequence of escalating obligations.
Their income is the same. Their exposure to risk is entirely different.
The illusion of income
In policy debates, these two couples are treated as one.
Why?
Because income and taxation profiles are visible, measurable, and easy for all of us to understand.
But income alone cannot tell us whether:
- spending is discretionary or forced
- assets provide security or are about to run low; and
- shocks can be absorbed or will cascade
In Maude and Joe’s case, income sits on top of deep reserves.
For Francine and Ivan, income is being pulled into a widening set of high costs that threaten to exhaust those reserves.
Yet both are treated identically in proposals to reduce OAS clawback thresholds.
What happens when OAS is cut
Government could lower the OAS threshold, increase the clawback, or do both.
The income effect is immediate—and equal—on both couples.
But the consequences are not.
For Joe and Maude, reduced OAS slightly narrows discretionary spending.
For Francine and Ivan, reduced OAS accelerates asset drawdown, compresses the timeline of financial stability and brings forward the point at which their savings are exhausted.
What is a marginal adjustment in one case becomes a structural risk in the other.
We also must remember that for middle income (pre-retirement) couples, OAS continues to play a fundamental role in terms of “earnings replacement”. By itself, C/QPP at 25% earnings replacement – and growing only very slowly with the new tranche – is not adequate to prevent a major drop in income upon retirement – the flat-rate OAS is a crucial part of Canada’s retirement income system for the majority.
The timing problem
OAS is often criticized as insufficiently targeted. But it is, in fact, time-sensitive in a way that wealth is not.
Income can remain stable even as health deteriorates, care costs rise, and assets are liquidated
But Francine and Ivan’s higher RRIF withdrawals may increase their income on paper – briefly until they run out—triggering further OAS clawbacks—precisely because they are under stress, not because they are better off.
This is the paradox: the system reads distress as capacity.
Why wealth matters
The difference between the two couples is not income.
It is wealth and resilience.
- One couple has assets that buffer risk
- The other has assets that are being consumed by it
A policy that ignores this difference will misfire.
Cutting OAS based on income alone:
- fails to distinguish between security and vulnerability
- penalizes those experiencing late-life shocks; and
- leaves untouched those whose wealth insulates them from those shocks
The case for a different approach
If the concern is fairness, then the policy instrument should match the problem.
A wealth-based approach—however modest or targeted—would recognize accumulated advantage, differentiate between discretionary and constrained households, and align contribution with capacity more accurately than income alone.
We need to consider what kind(s) of wealth taxes should be considered and how they should fit with income taxes/clawbacks/ RRIF withdrawal rules and how they could be phased in.
The problem with lowering the starting point for the clawback is that it shifts the range of taxable incomes with the stacked marginal effective tax rates (the 46.5% ) down into the middle class.
Any wealth tax would ask more of Maude and Joe who can absorb it.
It would ask less of Francine and Ivan whose resources are already under strain.
The political shortcut
Cutting OAS is often framed as courage.
It is not. It is a shortcut.
It avoids confronting housing wealth, examining inheritances and addressing tax treatment of assets. It targets a visible, administratively simple program instead of a less visible distribution of wealth, and the more complex tangle of income tax provisions the rich use to avoid tax.
OAS is not just a payment and it is not a piñata.
It is a floor.
It provides predictability, stability and a measure of protection against late-life volatility
When that floor is lowered uniformly, the impact is not uniform.
Those closest to the floor feel it first.
Two couples. One income.
One faces a choice between destinations.
The other faces a countdown.
A policy that treats them the same is not neutral. It is misaligned.
If the goal is to ask more of those who can afford it, then the system must look where capacity actually resides. Not just in income; but in wealth.
Cutting OAS assumes equality where none exists. A wealth-based approach begins where the differences actually reside.
And if we cut OAS, we must finally consider wealth
If Old Age Security is to be tightened, then one obligation follows.
We must stop pretending that income tells us all we need to know.
Two couples can report the same $190,000 in retirement income and live entirely different financial realities. One can absorb a deeper clawback with little consequence. The other, facing long-term care costs, family obligations, and forced withdrawals, may see the same policy accelerate the depletion of everything they have.
Yet our current system treats them as identical.
That is not targeting. It is blindness.
If policymakers are serious about fairness, then the next step is not simply to lower thresholds or increase recovery rates. It is to look beyond income and begin to recognize capacity—carefully, selectively, and where it matters most.
This does not require a sweeping, annual wealth tax on all seniors. It can begin with more practical steps:
- using multi-year income averaging so that distress-driven RRIF withdrawals are not mistaken for prosperity
- applying stronger recovery to capital income, which more clearly reflects asset-based capacity
- reviewing the tangle of arcane income tax provisions including privately-owned companies and trusts the rich use for tax planning
- introducing high-threshold asset signals, so that those with significant wealth are treated differently from those drawing down savings under pressure
- protecting against shock events, such as entry into long-term care, where costs surge and stability disappear; and
- treating housing wealth with care, recognizing its importance while allowing for deferral rather than immediate impact
None of this is radical.
It is simply an attempt to align policy with reality.
The alternative is easier. Lower OAS. Call it modernization. Move on.
But that approach leaves the central problem untouched: a system that can see income but cannot see the difference between security and vulnerability.
If we are going to ask more of seniors, we should at least ask it of those who can weather the cuts.
Joe and Maude can. Francine and Ivan cannot.