A tale of two clawbacks

“They’re selling postcards of the hanging; They’re painting the passports brown.
The beauty parlor is filled with sailors, 
The circus is in town.”

Bob Dylan Desolation Row  Highway 61 Revisited, 1965

I want to try something different.

I don’t want to get cynical or ‘desolate’ and engage in the usual hand wringing. I don’t want to harangue people about bad policy-making or tell governments that they don’t care. This is not a tale of futility. It’s more about vigilance and a call to improved advocacy from all of us.

For decades, economists on the right and the left, politicians, the public, and program recipients have complained about high marginal effective tax rates (METRs). These occur when tax rates on income combine with program clawbacks to create disincentives to earn more income. The disincentives are usually avoided through the establishment of earnings exemptions and lower rates of marginal taxation.

The theory is that when tax rates on income combine with clawbacks over the same ranges of earned income to produce an overall high level of confiscation, people receiving government benefits will be less likely to work.

There is an unprecedented consensus among all the players that reduced work effort will be the inevitable outcome.

Then why do governments sometimes dramatically raise clawbacks and METRs?

And why do they raise clawbacks and METRs most drastically for low income adults, the group that governments worry about most as it relates to work disincentives?

I play no favourites.

Increased clawbacks and METRs are implemented by governments of all stripes. The Ontario NDP did it in 1992 when they cut earnings exemptions to new applicants for social assistance. Mike Harris cut earning exemptions in Ontario for social assistance recipients in the late 1990’s.

Two   examples are recent.

They occurred in 2016  and 2018 when the federal Liberals raised METRs for Guaranteed income Supplement (GIS) recipients and the provincial conservatives announced higher METRs through increased clawbacks for social assistance (Ontario Works and Ontario Disability Support Plan) ODSP recipients.

Those two clawbacks are the subject of this short meditation.

The two clawbacks

In federal Budget 2016 entitled Growing the Middle Class, on page 171, further clarification was made respecting a $947 yearly increase to the lowest income GIS recipients. It read as follows:

“Single seniors with annual income (other than Old Age Security and Guaranteed Income Supplement benefits) of about $4,600 or less will receive the full increase of $947. Above this income threshold, the amount of the increased benefit will be gradually reduced and will be completely phased out at an income level of about $8,400.*

Without going into all the mechanics, this statement basically noted that the percentage of earnings that single low income seniors would be allowed to keep would be cut from 50% to 25% over a range of income from $4,600 to $8,400.

Cut in half

In other words, the amount of money a single senior would retain on income in that range was dropped in half.

Fast forward now to November 2018 when the Ontario government announced its social assistance reforms. It read this way:

“Introducing new Ontario Works earnings exemptions to encourage employment faster: recipients will be able to earn up to $300 per month without reducing their assistance, up from the current $200 flat rate. Twenty-five per cent of subsequent earnings would be exempt.” (And)

“Supporting People with Disabilities with Dignity: Improving earning exemptions for ODSP recipients by introducing a $6,000 flat annual exemption plus a 25 per cent exemption for earnings above $6,000 instead of the current approach which reduces support after monthly earnings exceed $200.”

Again, without going into the mechanics, Ontario Works recipients with more than $6,000 a year in earnings would be worse off and the amount they would be allowed to keep would be cut from 50% to 25% over a range of income from $6,000 to about $15,300.

ODSP recipients would be worse off after making $13,200 a year and would be allowed to keep would be cut from 50% to 25% over a range of income from $13,200 to about $$24,700.

Cut in half

In other words, the amount of money single social assistance recipients will retain now   on earnings in those ranges was dropped in half.

The language of improvement

Two governments, seemingly diametrically opposed in so many ways, within a three year period, did the same thing.

After hundreds of essays, reports, studies, treatises, articles and publications that all concluded the same thing about higher METRs causing work disincentives….

What did those governments do?

They increased clawbacks and METRs.

But they did not just drop the amount that recipients could keep of their wages by a small amount.

They dropped them in half from 50to 25%

Imagine anyone but the poor and low income people having the amount they could keep dropped in half. Think of the outcry if the amount well-to-do seniors could keep in their   OAS clawback was decreased from 85% to 70%. Think of any 25% increase in taxes for anyone paying income taxes.

I don’t have to tell you the answer.

Spinning newspapers like those in “Citizen Kane” would not do it justice.

The big question is “why did they do it?”

I have three theories.

  1. The Finance “poker theory of breakeven points”

Under this hypothesis, politicians and public servants sit around various Faustian tables knowing that there is only so much money. Finance officials note that if one Minister wants to increase a certain benefit, then a corresponding savings must be found and programs cannot be inadvertently expanded.

In this scenario, the federal Liberals wanted to give more money to poor seniors but little or nothing to ‘not quite so poor’ seniors. What they did was to keep the GIS ‘breakeven’ the same. The ‘breakeven’ is the amount in dollar terms where outside income (e.g. earnings) reduces benefits to zero.

And this is exactly what they did by reducing income retained by recipients over a zone of income from 50%.

What is that?

It’s $7.00 on a $14.00 minimum wage going to $3.50 an hour.

The provincial government did exactly the same thing by reducing income retained over a zone of income from 50% – the same $7.00 on a $14.00 minimum wage to $3.50 an hour.

The provincial government also went one better by lowering breakeven points for single Ontario Works recipients from over $19,000 to $15,300 and ODSP breakevens from over $30,000 to about $24,700.

These are important cards in ‘Finance poker’ and the potential dollars saved can go a long way to financing higher benefits (Liberals in 2016) and higher flat rate exemptions (PC’s in 2018).

So that’s Theory # 1.

  1. The “no one gets the math” theory

“At midnight all the agents and the superhuman crew…
Come out and round up everyone that knows more than they do”

This hypothesis should also have some weight. Although many people understand the idea of their tax rates and possibly their marginal tax rates, far fewer understand the concept of marginal effective tax rates. This allows government to say that they are increasing incentives and making programs better when they are doing exactly the opposite.

Governments can increase METRs with impunity on the poor and voiceless and simply get away with it.

A senior working in a hardware shop or serving coffee can go from effectively earning $7.00 an hour to $3.50 an hour and their situation belongs to no public discourse, no equation and no consideration.

It just happens and that’s it.

Have a nice day.

  1. The “collateral damage theory of work incentives”

This hypothesis is constructive. In other words, I am imputing motive to a system that is silent on its motives.

If all governments and economists know that high clawbacks and METRs reduce work effort, then we all know that cutting the amount that people can keep ‘in half’ in some ways proves that work incentives are unimportant.

Getting people to work is important. Benefit adequacy holds some importance and the point where people are cut off benefits is important. But working your way off benefits and the confiscation rate, for all the ink spilled on the topic, is ultimately not important in the eyes of governments.

In closing

Where do we go from here?

A good question!

What we do know is that all the theory, all the evidence, all the science, all the ideology and all the advocacy is not enough.

Disincentives matter but they don’t matter enough.

The call to arms in our advocacy is to reaffirm that they are important. Cutting in half what people can keep under the guise of improvement is no longer acceptable if it ever was.

We need to stop being confused.

Math be damned!

If you lose most if not more than a dollar for every dollar you make, we know two things: you don’t have an incentive to work and you are more than likely to be poor.

“…And the Good Samaritan, he’s dressing, he’s getting ready for the show
He’s going to the carnival tonight on Desolation Row.”

Dedicated to Munir Sheikh’s paper called Great Gatsby vs. Zero Dollar Linda

Miles Corak wrote the former and I wrote the latter.

They are worth the read!


js –December 23, 2018

* Budget 2016: see Chapter 5: Improving the Quality of Life for seniors: Increasing the Guaranteed Income Supplement for single seniors, p.171.