Parliamentary Research Branch

MR-58E

14 March 1990

TABLE OF CONTENTS

INTRODUCTION

A HISTORICAL PERSPECTIVE

THE REPORT OF THE JOINT COMMITTEE ON OLD AGE SECURITY

THE OLD AGE SECURITY FUND

In 1927, under the Old Age Pensions Act, the provincial and federal governments agreed to share the cost of means-tested old age pensions available to persons aged 70 and over. This legislation was superseded by the Old Age Security Act, which became effective on 1 January 1952 and provided universal, flat-rate old age pensions to Canadians 70 years of age and older who met residence requirements. The federal government assumed full responsibility for the program and financed it, in the early years, from the Old Age Security Fund, which was established as an account in the Consolidated Revenue Fund.

This paper will examine the Old Age Security Fund, focusing on the amount of revenue involved and how it was collected.

The Old Age Pensions Act of 1927 authorized the federal government to reimburse participating provinces for 50% of the pension payments made to British subjects aged 70 and over who had resided in Canada for at least 20 years, and for at least five years in the province where pension application was made. The maximum receivable was $20 per month, or $240 annually, reduced by the amount of other income in excess of $125 per year. The benefits were available to those who received less than $365 in annual income and who had not voluntarily assigned or transferred property in order to qualify.

In 1931, the Act was amended to increase the federal government’s share of pension payments from 50% to 75%, and in 1947 it was amended to eliminate the provincial residence requirement. The June 1950 "Report of the Joint Committee of the Senate and the House of Commons on Old Age Security" indicated that, as of March 1950, there were approximately 282,500 persons receiving old age pensions, representing about 43% of all persons 70 years of age and older. For the fiscal year ending 31 March 1950, the federal share of pension costs was estimated at $90 million and the provincial share at $30 million. At the same time, with a maximum monthly pension benefit of $40, which went to approximately 73.7% of pension recipients, the average monthly pension was $37.21.

The administration of the old age pension system and the development and application of the means test under the Old Age Pensions Act, were the responsibility of the provincial governments, despite the significant financial contributions of the federal government. This provincial administration of the program led to certain inequities across the country, and prompted suggestions that the means-tested pension be replaced by a universal pension, which would allow grater uniformity. In fact, it has been suggested that in the late 1940s most MPs felt that the means test should be eliminated, while most public opinion polls revealed public support for it, although increases in the level of benefits paid under the means-tested pensions and reduction in the qualifying age were seen as desirable. As indicated in Table 1, a majority of the public was seen to support universal pensions in the autumn of 1950, following the Report of the Joint Committee on Old Age Security, but overwhelming public support was not forthcoming until after the Old Age Security bill had been introduced into Parliament on 25 October 1951.

In its Report, the Joint Committee examined and rejected an old age insurance system; it recommended a two-fold old age security program. The first component of this program, to be implemented under the Old Age Security Act, was a universal pay-as-you-go program administered by the federal government and available to all persons aged 70 years and older who met residence requirements. The Committee recommended that the benefit should be a flat, uniform amount of $40 per month. Financing for this component was to come from specific earmarked contributions levied for that purpose.

Under the second component, to be implemented under the Old Age Assistance Act, the Committee recommended that old age assistance in the amount of $40 per month should be made available to individuals aged 65 and over who were not eligible for the universal benefit. With this latter component, need would be the determining factor for eligibility for assistance and for its amount. This component was to be paid for from general revenues and cost-shared between the federal and provincial governments.

The Committee supported the contributory principle for the first component both as a means of raising funds and of establishing an association between an individual’s contribution to the program’s cost and the future benefits, although the relationship would not be direct.. In order that the federal government could implement this contributory plan, it was necessary to amend section 94 of the Constitution Act, 1867 by adding section 94(a). This allowed Parliament to make laws in relation to old age pensions but without affecting any provincial laws in this regard.

The Old Age Security Act provided for an earmarked old age security tax to finance the universal pension. The special levy, effective in 1952, was actually a composite of three taxes – a tax on the manufacturer’s selling price ore duty-paid value of all items covered by federal sales tax, a tax on personal income, and a tax on corporation income. With the exception of the 1952 tax year, the tax rate was initially set at 2% for each component, with a limit of $60 per year on the tax on personal income as applied to the first $3,000 of taxable income. The combined levy became known as the "2-2-2 formula" and tax receipts were paid into an Old Age Security Fund kept as a separate account in the Consolidated Revenue Fund. No actual change in the overall sales tax rate occurred, since 2% of the 10% sales tax rate was re-allocated and credited to the new Fund. Benefits were paid out of the Old Age Security Fund, with the Minister authorized to make temporary loans to the Fund if pension benefits payable exceeded credits to it. The Minister was also required to review the state of the Fund annually.

In 1959, the 2-2-2 formula was changed to a 3-3-3 formula, so that the tax rate on each of the three components was increased, on a staggered basis, to 3% from 2%. As well, the maximum for the personal income tax component was increased to $90 from $60 annually. The personal income tax component was again increased effective 1 October 1963, with a 4% rate applied up to $120 per year.

When the means-tested Guaranteed Income Supplement (GIS) benefit was introduced in 1967, these payments were also charged to the Old Age Security Fund. To compensate for the additional demands placed on the Fund by the GIS and the progressive reduction of the age of eligibility for the universal pension from age 70 in January 1965 to age 65 in January 1970, the income tax component of the old age security tax was increased. Effective 1 January 1967, the limit on the income tax component was raised to $240 annually, levied on the first $6,000 of annual taxable income. At that time, the Minister of Finance stated that changes to the personal income tax component would only partly meet the demands on the Fund, and raised the general sales tax from 11% to 12%, except for building materials, and production machinery and equipment. This increase was intended to cover the balance, but was not earmarked specifically for old age security; however, a Fund deficit which would have to be covered from general revenues was not expected in the immediate future. The base of the sales tax component was eroded in September 1967 with the removal of the general sales tax from drugs, and was eroded further by the progressive removal during 1967 and 1968 of sales tax from production machinery and equipment.

The old age security tax was eliminated effective 1 January 1972, although the Fund was not abolished until 26 June 1975 by an amendment to the Old Age Security Act. The sales tax component became part of the regular sales tax, with no net change in the amount paid by the tax-payer. Abolition of the personal income tax component, beginning in the 1972 taxation year, was accompanied by a major restructuring of personal income tax rates implemented by the 1971 Income Tax Act. As well, each year the Minister of National Revenue was required to credit the Fund with an amount equivalent to the net amount lost by these changes. Currently, all old age security benefits are paid directly from the Consolidated Revenue Fund on a pay-as-you-go basis.

Table 2 reveals the amount of revenue collected under the old age security tax for the 1952 to 1972 period. As indicated, the corporation income tax was always a relatively insignificant source of revenue. In 1953-54, the first fiscal year in which all three taxes were levied throughout the entire year, the corporation income tax yielded only 19% of total revenues; this proportion subsequently declined to no more than 10%. As well, the table suggests that the sales tax provided the largest amount of revenue in the early years, but that the personal income tax component grew steadily in importance, partly due to changes in 1963 and 1967. Finally, with the exception of the 1952-53 shortfall, when the deficit was charged against the reserve for losses on the realization of assets, the Fund’s deficits prior to 1959-60 were charged as budgetary expenditures. Deficits after 1959-60 were financed by temporary loans from the Minister of Finance.

Finally, it should be noted that old age security benefits are not really universally available at a uniform amount. Given that payments made to pensioners are taxable income, a modest portion is recovered by the federal treasury through income taxes. A 1984 National Council of Welfare report on pensions has estimated that only about 6% of the old age security program’s costs are recovered in this way, since many elderly persons have limited incomes and pay little or no income tax.

Public Opinion on Universal Old Age Pensions , 1946-1951

Source: Canadian Institute of Public Opinion, cited in K. Bryden, Old Age Pensions and Policy-Making in Canada, 1974, p. 249.

1. For the three months ended 31 March 1952.
2. For March.
3. Provided for by budgetary expenditure.

Source: Canadian Tax Foundation, The National Finances: An Analysis of the revenues and expenditures of the Government of Canada, 1961-62, p.89 and 1972-73, p. 111.