Taylor Jackson: It’s time to fundamentally rethink how we support those with disabilities

As former Vancouver mayor Sam Sullivan outlined on a Hub podcast last week, Canada’s disability support programs are failing to meet the needs of disabled Canadians. There are visible problems with these programs—including the inadequacy of the benefits themselves—but one of the biggest is what might be characterized as a hidden barrier: punitive marginal effective tax rates (METRs) that discourage work, savings, and financial independence.

The structure of these benefits often creates a paradox where earning more can mean taking home less, a trap that undermines the goals these programs seek to achieve. Solving for these high METRs can help disabled Canadians earn more income and derive the non-material benefits from paid employment.

Marginal effective tax rates may sound wonky but they’re actually really important for understanding how government programs influence the economic behaviour of their recipients. In simple terms, they measure how much an additional dollar of income is effectively taxed, factoring in not just income taxes but also the loss of means-tested benefits and credits.

For Canadians with disabilities, METRs can exceed 70 percent or even 100 percent in some cases, meaning that earning an additional dollar can leave them worse off financially. This is particularly concerning given the additional costs of living with a disability—costs that government programs only partially offset.

This point is worth emphasizing: depending on where a disabled Canadian lives and what programs he or she draws on, an incremental dollar in employment income may cost them a full dollar in benefits or auxiliary programs.

For example, consider a person receiving disability benefits who takes on part-time work to supplement their income. As their income rises, they might lose or see reduced access to benefits such as the Canada Disability Savings Grant, housing subsidies, or provincial disability payments. Combined with federal and provincial income taxes, Employment Insurance premiums, and Canada Pension Plan contributions, the effective penalty for earning more can be staggering.

This creates a disincentive to work, save, or pursue education and training that could lead to higher-paying jobs. It traps individuals in a cycle of dependency, punishing their efforts to achieve greater autonomy and financial security. It must be understood as a policy failure.

At the heart of the problem lies the design of disability benefits, which are often means-tested and withdrawn as income rises. While this approach is intended to target assistance to those most in need, it inadvertently creates “cliff effects” where a small increase in income results in a sudden and significant loss of benefits. For many, the rational choice is to avoid earning beyond certain thresholds, even if it means declining work opportunities or limiting their career aspirations.

For instance, in Ontario, the Ontario Disability Support Program (ODSP) reduces benefits by 75 cents for every additional dollar of earned income after the first $1,000 per month. Add in the loss of other benefits, such as rent-geared-to-income housing subsidies, and the effective METR can exceed 80 percent. In practical terms, this means someone earning minimum wage might take home as little as 20 cents on every additional dollar they earn.

These financial disincentives can have significant financial and non-financial consequences. People with disabilities already face higher rates of poverty and unemployment than the general population. According to Statistics Canada, the employment rate for Canadians with disabilities is just 62 percent, compared to 78 percent for those without disabilities based on data from 2021. High METRs exacerbate these disparities by creating structural barriers to participation in the workforce.

For individuals, the impact is demoralizing. It sends the message that their efforts to contribute economically are not valued and that their ambitions are secondary to bureaucratic formulas. For society, it represents a waste of potential, as the talents and skills of people with disabilities are underutilized.

Addressing the METR problem in Canada’s disability benefits requires a shift in how we think about income support. Instead of penalizing additional income, we need policies that encourage financial independence while maintaining a safety net for those who need it.

At minimum, the goal should be to replace steep benefit cliffs with more gradual phase-outs. For example, reducing benefits by 20 percent for every additional dollar earned, rather than 75 percent or more, would allow individuals to retain a larger portion of their income, recognizing that disabled Canadians already experience higher costs of living as a result of their disabilities.

A more innovative policy approach would be to establish income averaging whereby individuals are permitted to average their income over several years to reduce the impact of temporary earnings spikes on benefit eligibility.

Either way, there’s a need for federal and provincial governments to work together to align policies and reduce the cumulative impact of benefit clawbacks and taxes.

Reforming METRs in Canada’s disability benefits is not just a matter of fairness; it is also good economics. When people with disabilities are empowered to work, save, and invest in their futures, they contribute more fully to the economy and reduce their long-term reliance on government programs. They also benefit from the dignity, independence, and self-actualization that come from paid work.

By addressing the punitive effects of high METRs, Canada can create a disability benefits system that lifts people up rather than holding them back. This is a moral and practical imperative, one that deserves urgent attention from policymakers at all levels.

This article was made possible by the Maple Leaf Centre for Food Security and the generosity of readers like you. Donate today.