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2008


"Ontario can help the poor save; but provincial rules blunt the impact of new tax-free savings plan for people on welfare"

This article was published in The Toronto Star on July 25, 2008.
Written by Don Drummond.

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For eight straight years, the number of welfare recipients in Ontario has remained unchanged, with an approximate caseload of 200,000. This puts into question the current system's ability to effectively transition high-risk groups, including working-age adults, to the labour force.

There are enormous social costs to bear when such a large number of people rely on the welfare system. It can place serious strains on recipients, their families and the communities they live in. However, enabling individuals to become self-reliant is not just a social imperative - it's also an economic priority. That's because, in an era of tight labour markets, our province relies on a greater participation in the workforce. We all have something to gain when an individual makes the successful journey from welfare to work.

The provincial government has made some important progress in related areas, most notably in alleviating poverty's impact on Ontarians. For instance, it has increased assistance to low-income families through a dental program as well as a new Ontario Child Benefit. And to ensure adequate funding for disability benefits, municipalities' costs have been uploaded to the province.

The federal government has also made some important steps to remove people from poverty. Its Working Income Tax Benefit effectively increases the after- tax gain from modest amounts of earned income. And with the introduction of the Tax-Free Savings Account in 2009, individuals can contribute up to $5,000 per year to a savings account, without being taxed on withdrawals or income earned.

Indeed this savings account represents the first real incentive for lower- income people to save. That's because, unlike an RRSP, the new savings account will not affect an individual's eligibility to participate in federal income- security programs.

However, Ontario and other provinces have not exempted account withdrawals from their income-tested programs.

A host of provincial assistance programs - including Ontario Works (welfare), subsidized housing and disability support - still take a look at an individual's liquid assets to ensure the person is in need, as described by legislation. For instance, the asset limit for a single parent receiving Ontario Works benefits stands at $1,607. That's less than one-sixth of the real value (i.e. after inflation) of the limit that the province allowed when it was introduced in 1948.

Low asset limits mean recipients risk losing all their benefits when they receive a minor windfall. It also means they cannot retain funds to meet normal contingencies and are prohibited from saving money that would help fund a return to work.

In essence, such limits reduce the incentive to participate in the new savings account. To encourage savings, and in turn enable greater self-reliance, we recommend Ontario exempt a lifetime contribution amount of $5,000 from needs-testing. This exemption for the savings accounts would be part of a limit we recommend for total assets of $5,500 for singles and $9,000 for couples.

These are by no means large amounts of savings. But with no assets, there is no buffer. Any interruption in income can force many low-income people onto welfare, especially in Ontario where so few unemployed get Employment Insurance.

In addition to the opportunity to raise asset limits to take advantage of the savings instrument, investing in them could be an effective tool for the provincial government to reduce extremely high marginal effective tax rates, which hurt low income families.

Essentially, these tax rates are the combined impact of imposing payroll and income taxes, reducing benefits and "clawing back" social-assistance income based on the money people make from outside sources, including work.

For instance, when a person receiving social assistance starts to work, each of the benefit programs they participate in begins to take money back. One program might take 50 cents, another 30 cents and another 25 cents on each new dollar earned. Marginal tax rates for low-income Ontarians can actually exceed 100 per cent, meaning there is no economic incentive for individuals to raise their income or save money.

To reduce the impact on low-income families, Ontario should also exempt Tax- Free Savings Account-related withdrawals from needs testing when applied toward a move to self-reliance.

This would increase the incentive for people on social assistance to deposit additional earned income or small windfalls into savings. Research shows that even modest savings stabilize lives and decrease economic disruption. Again, such an exemption promotes self-reliance and offers the transitional support required to get back into the workforce.

Undoubtedly such proposals will draw fire. Critics will state it's unfair for recipients with assets to collect welfare, and by doing so, the government is simply making welfare an easier lifestyle choice.

Others will predict a growth in caseloads as people now kept off assistance would be granted eligibility.

Some will argue that poor people can't afford to save money so the recommendations are irrelevant. The low use of RRSPs among the poor could be cited as evidence. We agree that the poor do not have much income to regularly set aside as savings. But to a degree, the low savings is a chicken-and-egg problem. Under current policy design, there is precious little return to the poor to save money. But many poor do receive money on occasion, through employment or various windfalls. They should have the same access as the wealthier to programs that will sustainably improve their lives.

If the purpose of welfare is to support transition, destitution while on welfare is not essential. And such proposals do not eliminate any work requirements and community participation by welfare recipients.

Furthermore, there is no evidence to suggest jurisdictions with higher asset exemptions or no limits experience a rise in caseloads. For instance, Alberta and Quebec have implemented exemptions while experiencing caseload declines or little change.

The Tax-Free Savings Accounts are coming in 2009. We think that Ontario should answer the call and make the policy changes needed to ensure that low- income Canadians are able to equally participate in the opportunity to build savings. We call on the Ontario government to use this opportunity to resolve issues associated with high marginal effective tax rates and low-asset limits in needs-tested programs.

The journey from welfare to work is not an easy one. But the province can reduce the roadblocks to self-reliance. It's the right thing to do for those in need, and for our economy.

Don Drummond is senior vice-president and chief economist at TD Bank Financial Group. John Stapleton is a policy fellow at St. Christopher House and the Metcalf Foundation.

 

Executive Headshot :  Don Drummond
Don Drummond
Former Senior Vice President and Chief Economist
TD Bank Financial Group

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