CONTINUED FINANCIAL ILLITERACY OF FINANCIAL GURUS EQUALS FINANCIAL DISCRIMINATION OF SENIOR SINGLES (Part 1 of 2)
(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.)
In February, 2016 the Broadbent Institute and Richard Shillington of Tristat Resources in Canada has published the report: “An Analysis of the Economic Circumstances of Canadian Seniors” http://goo.gl/HNP2Ee
The report information is mainly directed towards poverty of seniors without an employer pension plan (roughly 47 per cent) and therefore, many of these seniors have wholly inadequate retirement savings.
Using LIM (low-income measure) senior poverty has increased from a low of 3.9 per cent in 1995 to 11.1 per, or one in nine, in 2013. The poverty rates for single seniors, particularly women (at nearly 30 per cent), are very high and need to be addressed, (Page 2). (LICO, or Low Income Cut Off, is not used here because it is not a true income poverty indicator as it was set in 1992 where families spend 20 per cent more of their income on necessities than was typical and has not been reset since.)
(It should be noted in the report that single seniors does not refer to marital status, but the fact that they live alone. Therefore, single seniors includes ‘ever’ singles, divorced/separated, and widowed seniors living alone.)
In Canada, the income-tested OAS (Old Age Security) and GIS (Guaranteed Income Supplement) benefits together provide a regular minimum economic guarantee and are used to supplement regular income (from CPP-Canadian Pension Plan, private pensions and private savings) to lift seniors out of poverty.
Some of the key findings of the report include:
- The proportion of the population receiving the GIS is higher for senior singles than couples, and higher for single women (between 44 per cent and 48 per cent) than for single men (between 31 percent and 37 per cent), (Page 3).
- ‘Roughly half of those aged 55-64 with no employer pension benefits….. have savings that represent less than one year’s worth of the resources they need to supplement OAS/GIS and CPP. Fewer than 20 per cent have enough savings to support the supplemented resources required for at least five years, (Page 3)…..For those with incomes in $50,000-$100,000 range, the median value is only $21,000…..(Page 3).
- The overall median value of retirement assets of those aged 55-64 with no accrued pension benefits is just over $3,000. For those with annual incomes in the range of $25,000-$50,000. the median value is just over $250. For those with incomes in the $50,000-$100,000 range, the median value is only $21,000, (Page 3).
- Only a small minority (roughly 15-20 per cent) of middle-income Canadians retiring without an employee pension plan have saved….enough for retirement. The vast majority of those families with annual incomes of $50,000 and more will be hard pressed to save enough in their remaining period to retirement (less than 10 years)…..(Page 3).
- The seniors’ poverty gap is $2.5 billion in aggregate annually, due to the 719,000 poor seniors (469,000 singles and 250,000 living in an economic family.) A 10 per cent benefit increase in the GIS to address this gap would cost $1,628 million, and would reduce the number of poor seniors (married/coupled and singles) by about 149,000, (Page 3).
- In the recent election, the Federal Liberal Party promised to increase the GIS by 10 per cent for single seniors. (NOTE: this does not include coupled seniors). A simulation using Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M) suggests this would cost $700 million and remove about 85,000 single seniors from the poverty roles, with a reduction in the singles poverty rate of 5.7 percentage points, (Page 3). (Singles poverty rate of 5.7 percentage points from approximately 28 per cent for senior single females, and 24 per cent for senior single males, that’s all???)
Factors Affecting Seniors Poverty
As of July 2015, the income-tested maximum annual OAS/GIS benefits for seniors aged 65 and over with no other source of income were $15,970 for singles and $25,746 for couples…..The GIS is phased out as income rises and is reduced to zero above an annual income (thus calculated) of $17,136 for single seniors and $22,068 for senior couples, (Page 9).
Reliance on the GIS is greater for single seniors than it is for senior couples across all age ranges….. For example, 41 per cent of all seniors over 85 receive the GIS, while only 30 per cent of seniors aged 66-69 receive it. (Page 9).
Pension Coverage (Page 12)
The difference in incomes at retirement between those seniors with and without a pension income is stark…..The difference is not all due simply to the presence or absence of an employer pension plan. Those who have had an employer pension plan are more likely to have had better paying jobs, and jobs with health and other benefits. As well, it is possible for those who seek out jobs with a pension are more likely to be those motivated to save for retirement. But certainly, participating in a pension offers advantages that make it easier to have a higher income at retirement, (Page 12).
For couples, those without pension income have significantly lower total incomes ($52,000) to compared to those with pension income ($68,000). This is despite their higher income from earnings ($19,100 for those without pension income, compared to $7,200 for those with pension income).
For individuals, the story is very different: They are more likely than couples to be over the age of 70, and much less likely to be employed. For single women, the median incomes are $18,000 for those without a pension and $30,400 for those with a pension For men, the medians are $19,000 and $37,300, respectively. These gaps are significant, (Page 12).
LIM (Low Income Measure) is used in this report and is based on after-tax income to assess poverty of seniors. This measure shows what proportion of persons have after-tax incomes that are less than half of the median or midpoint to comparable families.
Two criterion to assess adequacy of income at retirement are: 1) poverty criterion, and 2) replacement rate concept, (Page 13).
Generally, the median incomes for those without pension income is just over half for those with pension income, (Page 13).
The report goes on “to suggest that a significant proportion of those without an employer pension plan will not have saved adequately for retirement and will suffer a major loss of income”.
Retirement savings without employer pension (Page 14-16)
Report states that from Survey of Financial Security for 2012 about half of families (what is the definition of family here?) aged 55-64 without an employer pension have virtually no savings; indeed 78 per of them have less than $100,000 in retirement savings. Lower-income families eligible for OAS/GIS along with CPP may still have little or no drop in income, however inadequate that income might be, (Page 14).
….Vast majority of these families with annual incomes of $50,000 and more will be hard pressed to save enough in their remaining period of retirement (less than 10 years) to avoid a significant fall in income. It appears that at least 25 per cent have very limited retirement assets despite incomes of $50,000-$200,000, (Page 15).
The report does state that ‘analysis presented in tables is somewhat simplistic because it ignores the impact of public benefits (OAS/GIS and CPP) on the amount that future seniors need to save. It is also accepted that many seniors need less income in retirement in order to maintain the standard of living that they had pre-retirement. The actual replacement rate required-the ratio of post-retirement to pre-retirement income-varies by how it is measured (pre- or post-tax). Seventy per cent is commonly used, although it varies by individual circumstances and tastes; higher values are more appropriate for the poor, and lower values are more appropriate for the very wealthy’, (Page 15-16).
Retirement savings compared to income (Page 16-20)
Tables show widespread under-saving using calculations of 70 per cent pre-tax replacement rate…
Some do not need to save for retirement to get 70 per cent replacement because their income is quite low (below $21,429 for singles and $35,714 for couples). These individuals and couples were deleted from table 5…..,(Page 16).
To illustrate, a family with an income of $100,000 (pre-tax) is assumed to need $70,000 (70 per cent of $100,000), and will get roughly $25,000 in public support. Thus, they will need to make up $45,000 per year from their private savings, (Page 16).
Even those with an income of more than $100,000 are unlikely to have more than five years worth of the required supplemental income in their retirement savings; only 21 per cent meet this criterion……(Page 17).
In summary, regardless of income, few of these families have enough savings to supplement their income for even one year. Only 15-20 per cent have enough for five or more years. (Page 17).
…..Many of those who argue that there is no looming pension crisis have included home equity as a liquid asset. This analysis has not treated home equity as a retirement asset because the replacement rate analysis has as its objective an income that allows one to enjoy a lifestyle comparable to that which existed pre-retirement. We do not include home equity here because we accept that the pre-retirement lifestyle for many middle- and moderate-income Canadians include continued homeownership, (Page 19).
One Option: Reducing seniors poverty with GIS
The report then makes suggestions for decreasing poverty rate. One option is reducing seniors poverty with short term changes to GIS. One of the paragraphs is as follows:
Table 6 presents estimates of the poverty gap using Statistics Canada’s SPSD/M microsimulation model. The poverty gap is the total amount of money that would be needed to raise the incomes of all poor seniors to the LIM poverty line-ignoring any behavioral impacts of the transfer programs used to achieve that goal…..The poverty gap is $2.5 billion in aggregate, which is due to the 719,000 seniors: 419,000 singles and 250,000 living in an economic family. The average gap is $2,400 for singles and $5,500 for seniors in a family, (Page 20-21).
Table 7 represents the results of increasing the single and married GIS amounts by the same percentage. One should keep in mind that there is an incentive for seniors to appear as singles to governments even if they are living as a couple. This is because the GIS for senior couples is less than twice the amount for singles. An increase in the GIS for singles only (with no increase for couples) would increase this so-called ‘tax on marriage’ and associated incentives. This would encourage couples to hide their cohabitation from the authorities for financial reasons, (Page 21).
The notation (# 28) at the bottom of page 21 states: While legislation treats those cohabiting the same regardless of their marital status, it is easier to deceive the government if you are not married. (Really??? How is this so when single status needs to reported on income tax returns; lying about marital status is a felony?).
Taking one example (from Table 7) of the tabulated results, a 10.0 increase is estimated to increase the cost of the GIS by $1,628 million to yield a poverty rate of 10.5 per cent and to reduce the number of poor seniors by about 149,000, (Page 22).
The (Federal) Liberal Party’s proposal in the recent election was to increase the GIS by 10 per cent for single seniors. The SPSD/M simulation suggests that this would cost $700 million and remove about 85,000 single seniors from poverty, with a reduction in the singles poverty rate of 5.7 percentage points. While a reasonable starting point, clearly much more can be done to reduce the poverty rate, (Page 22).
Conclusions
Poverty rates for seniors have been trending up since 1995. Rates remain unacceptably high for single seniors-particularly women-and the worsening trends in pension coverage point to further increases in poverty in the future. The GIS is the most effective federal mechanism in the short term for reducing the poverty rate and the impact of poverty on seniors, and it can be targeted at senior singles who need it the most, (Page 23).
(This blog is of a general nature about financial discrimination of individuals/singles. It is not intended to provide personal or financial advice.)
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