Canada’s Retirement Income System
Did you know that you’ve already started building your retirement income? By living and working in Canada, you participate in one of the best public pension systems in the world.
CANADA’S RETIREMENT INCOME SYSTEM HAS THREE LEVELS:
- Old Age Security (OAS) provides the first level, or foundation. If you meet certain residence requirements, you’ll be entitled to a modest monthly pension once you reach the age of 65.
- The Canada Pension Plan (CPP) is the second level of the system. It provides you with a monthly retirement pension as early as 60, if you have paid into it. The Canada Pension Plan also offers disability, survivor and death benefits. Quebec has a similar plan, called the Quebec Pension Plan.
- The third level of the retirement income system consists of private pensions and savings.
The first and second levels of Canada’s retirement income system make up Canada’s public pension system. Today, these pensions form a significant part of the income of Canada’s seniors. But public pensions are not intended to meet all your financial needs in retirement. Rather, they provide a modest base for you to build upon with additional, private savings.
Many financial planners say that you will need about 70 percent of your current (pre-tax) earnings to maintain your standard of living in retirement. For example, if you earn $60,000 now, you might aim for $42,000 of income in retirement. However, this is only a general rule. You’ll need to look at your own circumstances to decide what level of income is right for you.
OLD AGE SECURITY
The Old Age Security (OAS) program is the cornerstone of Canada’s retirement income system. It includes a basic pension that goes to almost all people 65 or older who have lived in Canada for a certain time. Old Age Security is Canada’s largest public pension program. It provides a modest monthly pension to most people, starting at the age of 65.
The Government of Canada pays OAS benefits from general tax revenues.
You qualify by living in Canada.
Generally, you must be 65 and a resident of Canada for at least 10 years after your 18th birthday to receive OAS in Canada.
A little history: OAS (Old Age Security program) was introduced in 1951 and was designed for pension at the age of 70. In 1960 the age criteria has been changed, the new age requirement to receive these benefits was reduced to 65. Since then, the average life expectancy has increased in men by 5 years and 7 years in women. Constantly increasing life expectancy, with increasing number of retirees (baby-boomer) has become a bigger financial burden to the government. In 1970s, there was 1 pensioner to 7 active workers, in just 20 years that ration has changed to 2 active workers per pensioner.
A person that has lived in Canada for over 20 years since the age 18 will continue to receive OAS even if this person moves from Canada to another country. However, if the person has not lived in Canada for at least 20 years since the age 18 and leaves Canada for a period longer than 6 months, excluding the month in which departure occurred, pension payouts for any period beyond those 6 months may be stopped. The person would have to reapply for OAS upon their return.
How much income to expect
The amount of OAS you receive depends on the number of years you live in Canada after you turn 18. Generally, you receive a full pension if you live in Canada for at least 40 years after 18. If you live here for less time, you may qualify for a partial pension. With a partial pension, you’ll receive 1/40th of the full pension for each complete year you live in Canada after you turn 18.
SUMMARY OF OAS RATES AND BENEFITS
|Maximum OAS, GIS and SPA Benefit Rates for April to June 2016||Maximum Monthly payment amount||Maximum annual income to receive the OAS pension and benefits|
|Old Age Security (OAS) Maximum benefits||$570.52||$119,398
Footnote 2 (individual income)
|Guaranteed Income Supplement (GIS) amounts for individuals receiving a full Old Age Security (OAS) pension||If you are a single, widowed or divorced pensioner||$773.60||$17,304
|If your spouse/common-law partner receives the full OAS pension||$512.96||$22,848
|If your spouse/common-law partner does not receive an OAS pension||$773.60||$41,472
|If your spouse/common-law partner receives the Allowance||$512.96||$$41,472
|Spouse’s Allowance (SPA) (for pensioners from age 60 to 64)||If your spouse/common-law partner receives the GIS and the full OAS pension||$1,083.48||$32,016
|If you are a surviving spouse or common-law partner||$1,213.00||$23,328
The table was created using the information from Service Canada website www.servicecanada.gc.ca/eng/services/pensions/oas/payments/index.shtml.
If you have little or no income other than the OAS pension when you retire, you may be eligible for the (GIS) Guaranteed Income Supplement, a guaranteed addition to your pension. Almost a million and a half pensioners, whose base income, based on certain standards, qualifies as low, qualify for the federally guaranteed addition Guaranteed Income Supplement (GIS). The amount you receive depends on your income or your joint income if you have a spouse or common-law partner. Its size depends on your income or a combination of your and your spouse’s income. It is an addition to your monthly OAS pension. Maximum GIS payment for the year 2016 is $773.60 for one person and $512.96 per spouse if it is a couple.
Depending on total income of the person receiving the pension, an increase in the income may result in reduction of social benefits. Such a reduction is referred to as clawback. The sum of social assistance and its reduction is determined based on the pensioner’s base income from last year, excluding the Old Age Security portion. The income includes pension from the Canadian Pension Plan, pension from your employer, individual RRSP, interest on savings, etc. GIS will decrease by $1 for every $2 of income, generated outside the Old Age Security.
The sum of income, at which the social benefits are fully reduced is referred to as income level cutoff.
For one person
The maximum government addition to pension (GIS benefit), paid to a single pensioner or an elderly, who’s spouse or common law is not receiving Old Age Security and any social assistance, in the first quarter of 2016 would have been $773.60. The addition would have been reduced by $1 for every $2 of base pension income. A single person loses qualification to receive this addition, if their pension income outside of Old Age Security is $17,304.
Spouse and common law partners.
A person whose spouse or common law partner is also receiving a pension or any social assistance, in the first quarter of 2016, as a government addition would have received a maximum of $512.96 per month. This amount would also decreased by $1 for every $2 of base pension income. A couple loses qualification to receive this addition, if their combined pension income outside of Old Age Security is $22,848.
OAS is taxable, GIS and the Allowance are not.
If your net individual income is above a set threshold, your OAS pension will be reduced. This threshold ($71,592 in 2014) is adjusted each year for inflation. Only about five percent of seniors receive reduced OAS pensions, and only two percent lose the entire amount.
If you receive the basic OAS pension while living outside Canada, it is paid in Canadian dollars and you receive a tax slip to report it in your country of residence. Your pension may also be subject to Canadian income tax.
OAS pensions, the GIS and the Allowance are adjusted for inflation every January, April, July and October.
Keep your records to prove the time you live in Canada.
If you live outside the country for a period of time, keep records of your travels (such as passports and airline tickets) to show when you left and when you returned to Canada. This will help prove your eligibility for the OAS pension.
IT’S NOT AUTOMATIC – You should apply for your Old Age Security pension six months before you turn 65. To receive the Guaranteed Income Supplement and the Allowance, you must also apply for them, and then renew them every year. This is usually done by filing an income tax return before April 30.
As of July 2013, you can defer receiving your Old Age Security (OAS) pension for up to 60 months (5 years) after the date you become eligible for an OAS pension in exchange for a higher monthly amount. If you delay receiving your OAS pension, your monthly pension payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70. (Source - www.servicecanada.gc.ca/eng/services/pensions/oas/changes/deferral.shtml)
If you choose to defer receipt of your OAS pension, you will not be eligible for the Guaranteed Income Supplement, and your spouse or common-law partner will not be eligible for the Allowance benefit for the period you are delaying your OAS pension.
CANADA PENSION PLAN
The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) can provide you with a monthly retirement pension and other benefits.
The Canada Pension Plan pays a monthly retirement pension to people who have worked and contributed to the CPP. The CPP also acts as an insurance plan, providing disability and survivor benefits for those who qualify. It provides a monthly income to you and your dependent children if you become severely disabled during your working years. It also provides a monthly income to your surviving spouse or common-law partner and dependent children if you die. A lump-sum death benefit is available to your estate when you die.
Your CPP contributions are based on earnings between a minimum and maximum amount, as measured by statistics Canada.
For example, in 2015, you pay contributions only on earnings between $3,500 and $52,500.
If, Helga earned a total of $27,000 in 2015. Her contributory earnings are therefore $23,500, calculated as ($27,000 – $3,500). For example, Helmut earned a total of $62,000 in 2015. His earnings are above the maximum $52,500, so his contributory earnings are $49,000, calculated as the lesser of $62,000 and $52,500 minus $3,500.
In 2013, the employee’s contribution rate was set at 4.95% of pensionable earnings. (Service Canada -
www.servicecanada.gc.ca/eng/services/pensions/cpp/contributions/index.shtml). Self-employed individuals contribute both the employer and employee’s shares, or 9.9% of pensionable earnings in 2013.
In 2016, Joe, who is self-employed, earned $62,000 after all business expenses. This amount is above the maximum. His contributory earnings are $49,900, calculated as ($52,500.- $3,500). His CPP contribution for the year is $4,851.00, calculated as ($49,000x 9.9%). If Eleanor earned $22,500 in 2015 from her employer. Her contributory earnings are $19,000, calculated as ($22,500 – $3,500). Her CPP contribution is $940.50, calculated as ($19,000 x 4.95%). Her employer also contributes $940.50.
SUMMARY OF CPP RATES AND BENEFITS
|Contributions (in dollars)||Annual|
|Yearly maximum pensionable earnings||52,500.00|
|Employer contribution rate||4.95%|
|Employee contribution rate||4.95%|
|Maximum employee contribution||2,425.50|
|Maximum self-employed contribution||4,851.00|
|Maximum benefits||Maximum monthly payment amount (2016)||Maximum annual payment amount (2016)|
|Retirement pension, age 65||$1,092.50||$13,110.00|
|Maximum disability pension||for disabled contributor||$1,212.90||$14,554.80|
|for dependent child||$228.66||$2,743.92|
|Survivor’s benefits||surviving spouse, age 65 or over||$607.50||$7,290.00|
|surviving spouse, under 65 and raising a dependent child or disabled||$556.64||$6,678.68|
|dependent child (orphans benefit)||$228.66||$2,743.92|
The table was created using the information from Service Canada website http://www.esdc.gc.ca/en/cpp/benefit_amount.page.
Your employer deducts your contributions from your pay and makes an equal contribution. If you are self-employed, you act as both employee and employer and pay both portions.
The Canada Customs and Revenue Agency (CCRA) collects contributions on behalf of CPP. CPP funds are kept separate from general tax revenues. They are used only to pay benefits, cover administrative costs and make investments.
You qualify by working in Canada
Generally, all workers in Canada over the age of 18 pay into the CPP (or the QPP) and qualify for benefits.
How much income to expect
In general, your retirement pension replaces about 25 percent of the earnings on which you paid into the CPP. The exact amount depends on how much and for how long you contribute. The age at which you decide to take your pension also affects the amount you receive each month.
In 2016, the maximum CPP retirement pension is $1,092.50 per month if taken at the age of 65.
CPP coverage offers some flexibility
Over the course of your career and if you raise a family, there may be years when you have low or even no earnings. This would normally reduce your CPP benefits because of the lower contributions you make during those years. However, CPP excludes 15 percent of your lowest earning years when calculating your retirement pension. Time spent away from work while you raise children under the age of seven can also be “dropped out” of the calculation; these provisions ensure that your future pension is not reduced because of a few low-earning years.
The age you start your pension makes a difference… forever
The normal age that you start receiving a CPP retirement pension is 65. However, you can start receiving your pension as early as 60 or as late as 70. If you start your pension before 65, you must stop working or earn less than a maximum amount for a required period of time. If you start your pension early, it is permanently reduced by 0.6 percent for each month that you are under 65. If you start your pension later, it is increased by 0.7 percent for each month that you re over 65, up to the age of 70.
CPP retirement pensions are protected from inflation
CPP monthly retirement pensions are adjusted for inflation every January to keep up with increases in the cost of living.
CPP retirement pensions are taxable
You and your spouse or common-law partner can share your CPP retirement pensions equally if you are at least 60 years old and have both applied for retirement pensions. This may result in income tax savings. You must apply to have your pension shared.
Plan for your retirement – use your personal Statement of Contributions
Each year, we provide a personal “Statement of Contributions” to all CPP contributors. If you are 30 or over, your statement estimates the retirement pension you can expect from the CPP. It also estimates the benefits you and your dependents could receive if you became disabled or died. Your statement is a very useful financial planning tool.
Verify your Statement of Contributions
Your statement gives a detailed history of your earnings and of your contributions to both the Canada Pension Plan and Quebec Pension Plan (if you worked in Quebec). You should make sure your statement is accurate. You may find it helpful to compare the employment income and CPP contributions you reported on your annual income tax returns with the earnings and contributions recorded on your statement.
IT’S NOT AUTOMATIC - You should apply for your CPP retirement pension at least 6-11 months before you want it to start. You can obtain an application by internet or by phone.
Have you lived or worked outside Canada?
Canada has agreements with many countries that can help you to get social security benefits from either country. If you did not live or work long enough in one country to qualify for benefits there, the time your spent in that country may still be considered when determining your eligibility to receive benefits from either country. To find out if a country has an agreement with Canada, visit web site or call toll-free number (useful links).
Information about the third level of the retirement income system that consists from group and private pensions you can read in section “Canada’s Retirement System and RRSP” (Employer Pension Plans).
This information was taken from Human Resources Development of Canada brochure “Canada’s Retirement Income System. What’s in it for you”.