End Penalties That Punish Low-Income Seniors Who Work

Economic Note proposing targeted and fiscally responsible policy solutions that could offer relief to seniors who need to work to make ends meet

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This Economic Note was prepared by Jason Dean, Assistant Professor of Economics at King’s University College at Western Ontario, and Associate Researcher at the MEI, in collaboration with Gabriel Giguère, Senior Policy Analyst at the MEI. The MEI’s Taxation Series aims to shine a light on the fiscal policies of governments and to study their effect on economic growth and the standard of living of citizens.

For various reasons, including insufficient pensions to maintain their living standards, seniors are increasingly turning to work. Yet the current tax-and-benefit system merits reform as it undermines their efforts, with the harshest effect on low-income seniors.

Hundreds of Thousands of Working Low-Income Seniors Are Penalized

Based on the 2022 Canadian Income Survey, just over 600,000 seniors fall below Statistics Canada’s low-income cut-offs before tax (LICO-BT).(1) This relative measure signifies deep financial distress, where a lion’s share of their limited income is devoted to core necessities. These seniors form a subgroup within a larger population of about 2.26 million seniors whose incomes qualify them for the federal Guaranteed Income Supplement (GIS).(2)

Among this larger group, there has been a striking rise in employment. Between 2014 and 2022, employment among GIS recipients aged 65 and older increased by roughly 56%, and among the youngest of this group, aged 65 to 69, by about 64%.(3)

Between 2014 and 2022, employment among GIS recipients aged 65 and older increased by roughly 56%.

To manage financially, low-income seniors rely on three support pillars: Old Age Security (OAS), the Canada Pension Plan (CPP), and the Guaranteed Income Supplement (GIS). But when they work, these pension and income-support benefits can be impacted significantly.

The first pillar is Old Age Security (OAS), a federal benefit paying a maximum of roughly $9,000 annually to anyone over 65 who has lived in Canada for at least 40 years. OAS is clawed back only at high incomes, and gradually.(4) As a result, it provides a reliable floor, as these seniors’ earnings typically remain below the clawback threshold.

The second pillar is the Canada Pension Plan (CPP). Unlike OAS, CPP benefits depend on how much and how long a person contributed throughout their working life. Not all seniors start retirement on equal footing, since shorter or interrupted work histories result in lower CPP entitlements. Not surprisingly, these seniors are more likely to have had low incomes, and report that they work out of necessity.(5) CPP benefits are unaffected by employment after retirement begins, but additional contributions from working seniors under age 70 can slightly enhance future CPP payments.

The Guaranteed Income Supplement is non-taxable, but it is highly impacted when seniors decide to work.

For seniors with moderate income from private pensions or savings, there is little additional public support in the form of the Guaranteed Income Supplement (GIS). Only seniors with no income beyond OAS qualify for the maximum benefit of roughly $15,000 annually.(6) Unlike CPP and employment income, the GIS itself is non-taxable, but it is highly impacted when seniors decide to work. Generally, for each additional dollar earned beyond OAS, GIS benefits are reduced by 50 cents. Currently, employment income (including from self-employment) receives a modest exemption. The first $5,000 is fully exempt, and the next $10,000 at 50%. This means earnings beyond $5,000 immediately face a steep marginal effective tax rate, even before accounting for income taxes, other credit reductions, and payroll taxes.

While OAS and the CPP are largely unaffected by employment, the GIS is a double-edged sword. Though it provides a generous top-up, often exceeding OAS itself, it is aggressively income-tested, which sharply penalizes any efforts to work in order to get ahead.

Measuring the Work Penalties with Participation Tax Rates

Work disincentives are well-documented in terms of marginal effective tax rates (METRs), which are a measure of how much of an extra dollar earned is lost to higher taxes and reduced benefits. They have been linked to poverty traps because they financially punish those who decide to work.(7) Other evidence shows that low- to middle-income seniors can face METRs that rival those faced by higher-income workers.(8) While METRs capture incentives at the margin (small changes in earnings), they miss the broader decision seniors face about whether work is financially worthwhile at all.

A more appropriate measure is therefore the participation tax rate (PTR). This is the share of employment income lost to higher taxes and reduced benefits when moving into work. Put differently, it shows, in percentage terms, how much of their paycheques seniors lose by participating in the workforce, and summarizes the entire work decision into one clear number.

Figure 1 reports calculated PTRs for five unique scenarios highlighting a range of key drivers that contribute to the work penalties faced by low-income seniors. These include employment intensity (part-time vs. full-time), wage levels (minimum vs. moderate), modest private pension income (workplace or RRIF), and household structure (single vs. couple). (See the Annex on our website for a detailed overview of the simulated scenarios.) The lower section of each column represents net financial gains from working, while the top section represents clawbacks and taxes.

Scenario 1 is a baseline representing the poorest senior situation. They have lifetime minimum-wage CPP benefits, no pension or savings, and part-time earnings of about $13,000 to meet basic needs unmet by OAS, the CPP, and the GIS. Even for this scenario, there is a substantial penalty, with 17.5% of every dollar earned disappearing through taxes and benefit reductions. The GIS clawback alone accounts for almost 90% of this penalty, as shown in Table 1. This illustrates the aggressive nature of GIS reductions, which can weigh heavily on the lowest-income seniors.

Scenario 2 shows how quickly PTRs rise with only modest additional pension income ($4,200 annually, plus slightly higher CPP benefits from lifetime union wages). That small increase in baseline income is enough to accelerate benefit reductions, pushing the PTR to nearly 40%. Seniors in this situation are punished with both substantial GIS clawbacks and higher income taxes as their earnings increase. As seen in Table 1, the PTR is now roughly balanced between GIS reductions and income tax changes.

Those seniors needing full-time work are punished much more. This is modelled in Scenario 3, with the same pension baseline as Scenario 1 but now earnings of roughly $48,000 annually. Their PTR rises significantly to 48.3% (versus 17.5% in Scenario 1). The GIS clawback still accounts for nearly 75% of this penalty. As there is only so much GIS to claw back, income taxes and payroll deductions begin to dominate the penalty. Although not below standard poverty thresholds, if seniors in this situation lived in urban Toronto, a one-bedroom apartment at CMHC’s average of $24,504 annually would eat up about half their after-tax income.(9)

The participation tax rate shows how much of their paycheques seniors lose by participating in the workforce.

Scenario 4 shows how low-paid, interrupted work histories that depress CPP benefits can raise the PTR, in this case to 50%. Lower CPP benefits raise reliance on the GIS, leaving more benefits exposed to clawbacks as seniors earn wages. Finally, Scenario 5 changes only the family structure in Scenario 4 to a couple, and the PTR falls slightly to 45.2%. One might expect the couple PTR to be far lower. But while some pension income can be split for tax purposes, employment income cannot, and the GIS is assessed on combined income, so a single earner’s paycheque still reduces the GIS for the household, keeping the PTR high. (The PTR is thus slightly lower because, before working, the couple’s higher combined CPP more than offsets their higher maximum GIS entitlement.)

These observations point to an urgent need for policy reform that removes disincentives to work for low-income seniors. After a lifetime of doing their part, seniors who must rely on a paycheque because of life circumstances should not lose so much of it. More supportive, targeted, and fiscally responsible policy solutions exist that could offer relief.

A Higher GIS Earnings Exemption

An optimal policy is one that is simple to administer, well-targeted, fiscally reasonable, and effective at reducing high PTRs. One obvious reform is to significantly extend the GIS employment-earnings exemption. A sensible cap would be $30,000, as it aligns closely with Statistics Canada’s before-tax LICO threshold for a single senior in urban areas ($30,526). This reform would sharply reduce PTRs by removing most, or even all, GIS clawbacks on employment earnings. As a result, PTRs would move much closer to the non-GIS levels shown in Table 1, ranging from 2.0% to 28.0%. Seniors earning above $30,000 would still face some GIS reductions, but their PTRs would still be substantially lower.

There is no need to worry about the policy extending GIS eligibility to higher-income seniors. Any earnings above the exemption would still trigger GIS reductions. By shielding only more modest earnings, the policy would keep benefits aimed squarely at low-income seniors.

The fiscal impact of this relief is also reasonable. The combined revenue loss for the government in 2025 dollars would be $544 million, representing only 2.9% of the total GIS budget for fiscal year 2025.(10) This estimate is a conservative one, as it does not model behavioural responses; if seniors work more as a result, increased income and excise taxes would partly offset the government’s revenue loss. (See the Annex for a deeper discussion of how the fiscal impact was estimated.)

Given the modest fiscal impact and the urgency of providing relief to seniors, there remains ample fiscal room to tackle the second barrel of the penalty, namely, payroll and income taxes. The GIS reform does most of the work. But even after these are reduced or partly exhausted, the PTRs can still remain high enough to weaken the reward to work. At that point, taxes and payroll deductions do most of the damage. There are two complementary ways that can help further reduce these penalties.

One obvious reform is to extend the Guaranteed Income Supplement employment-earnings exemption. A sensible cap would be $30,000.

First, payroll deductions should be simplified by eliminating Employment Insurance premiums and automating CPP contribution opt-outs for working seniors who are already receiving CPP (ages 65–69). For many seniors, EI is unlikely to be used, and CPP contributions mainly purchase a small additional CPP payment. Currently, opting out requires paperwork that many may be unaware of. A more sensible default would be no CPP deductions, with a simple opt-in for seniors who want to keep contributing to earn the post-retirement benefit. This would likely have minimal fiscal impact, and could shave a few percentage points off PTRs.

Second, a modest senior top-up to the Canada Workers Benefit could be tailored to further offset income taxes in a targeted way. Because the program already exists, this would be quick to implement. This small top-up could be aimed at low earnings and phased out quickly. Since it could be paid quarterly, it would reward work sooner and help offset tax-side penalties without materially increasing program costs.

Conclusion

Low-income seniors who decide to work should not face a double-barrelled penalty of clawbacks and taxes. The PTRs calculated above are punishingly high even for the most financially strained seniors earning minimum wage part-time, who lose nearly 20% of each extra dollar they earn. Penalties remain especially severe for seniors with interrupted and low-paid work histories that depress CPP benefits and increase reliance on the GIS.

A clear, practical reform is to significantly raise the GIS earnings exemption to a level aligned with poverty thresholds. Complementary steps to reduce seniors’ payroll and income taxes through targeted tax credits could further lower their burden and reduce the stacked penalties seniors face when they work.