Canada’s Retirement Income System
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 do not meet all your financial needs in retirement.
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 $40,000 now, you might aim for $28,000 of income in retirement. However, this is only a general rule.
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.
Residing in Canada already qualifies you for this pension.
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 bit of history: OAS (Old Age Security program) was introduced in 1951 and was designed for 70-year-old retirees. In 1960 the age requirements were changed and the age required to qualify to receive these benefits was reduced to 65 years. Since then, the life expectancy has increased by 5 years for males and 7 for females. Constantly increasing life expectancy with addition of the number of new retirees (baby-boomers) has become a financial burden for the government. In 1970s there was one retired person for every 7 employed, in 90s there was 4 employed people for one retired person, in 20 years, there will only be 2 employed people for each retired person.
If you wish to receive the basic OAS pension outside Canada, you must have lived here for at least 20 years after your 18th birthday. If you have not resided in Canada during 20 years after your 18th birthday and left Canada for a period over 6 months excluding month when you left, your OAS payments may be stopped. To start receiving OAS again you have to reapply.
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 July to September 2021 | Maximum Monthly payment amount | Maximum annual income to receive the OAS pension and benefits | |
| Old Age Security (OAS) Maximum benefits | $626.49 | $129,581 Footnote 2 (individual income) |
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| Guaranteed Income Supplement (GIS) amounts for individuals receiving a full Old Age Security (OAS) pension | If you are a single, widowed or divorced pensioner | $935.72 | $18,984 (individual income) |
| If your spouse/common-law partner receives the full OAS pension | $563.27 | $25,104 (combined income) |
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| If your spouse/common-law partner does not receive an OAS pension | $935.72 | $45,504 (combined income) |
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| If your spouse/common-law partner receives the Allowance | $563.27 | $$45,504 (combined income) |
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| 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 | $1,189.76 | $35,136 (combined income) |
| If you are a surviving spouse or common-law partner | $1,418.25 | $25,560 (individual income) |
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This table contains data from government 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 Guaranteed Income Supplement. Almost one and a half million retirees, whose basic income, based on set threshold, is low, qualify for the federal Guaranteed Income Supplement. The amount you receive depends on your income or your combined income if you have a spouse or common-law partner. The GIS is added to your monthly OAS pension. Maximum GIS payments in 2021 were $935.72 per person and $563.27 per spouse.
Depending on total income of the retiree, increase in his/her income may result in reduction of social benefits. Such reduction is defined by the term claw back. Amounts of social assistance and its reduction are derived from the amount of income of the retiree from the previous year, not including Old Age Security. The income includes Canadian Pension Plan, pension from employers, individual RRSP, interest on your savings etc. GIS is reduced by $1 for every $2 of income excluding the existing OAS payments.
Total income amount, at which point the social benefits are completely deducted is defined by the term income level cut-off.
Actual numbers
GIS payments to single individual.
Maximum government pension supplement (GIS benefit), payable to a single retiree or an old person, who’s spouse or a common-law partner is not receiving OAS or social assistance, in the third quarter of 2021 was $935.72. This supplement is reduced by 67 cents for every $1 base retirement income. Single individual loses qualification to receive such supplement, if the retirement income less OAS is more then $18,984.
GIS payments to spouses and common-law partners.
An individual with a spouse or a common-law partner who also receives pension or social assistance, in the first quarter of 2021, was qualified for a maximum supplement of $563.27 per month. This amount is also reduced by $1 for every $2 of base retirement income of the couple. A couple loses qualification to receive such supplement, if the retirement income less OAS is more then $25,104.
The right to receive Guaranteed Income Supplement applies equally to all retirees, including those that receive a less than full amount of OAS, but this supplement is most important for immigrants, that have arrived to the country at older age, and by the time they reach retirement age have not resided in Canada for full 40 years. Such supplement is calculated based on annual basis, in other words, the most important factor to qualification for the supplement is previous year’s income. Possession of a paid off or not paid off property does not have any affect on the supplement, but it can only be received by permanent residents of Canada. If the recipient leaves the country for a period of more than 6 months, the payments stop. Upon return, an application has to be submitted and the GIS payments will be resumed, if the recipient still qualifies. the missed payments are not compensated.
The Allowance – one of the forms of government supplement, introduced to protect people from living in poverty at older age. According to law, such monthly allowance is collectible by spouses and common-law partners of retirees, as well as widows and widowers between the ages of 60 and 64, under the condition that they have resided in Canada for more than 10 years after turning 18 (considering any agreements with other countries), and if, according to established standards, their income qualifies as low. In 2010, the allowance was received by almost 90,000 people.
The Allowance is designed to help people bridge the gap to age 65, when they begin receiving OAS.
The Government of Canada pays these benefits from general tax revenues. Amount of payments is calculated based on total income of the recipient.
Actual numbers.
Allowance payments for spouses and common-law partners..
Maximum amount of Allowance that spouses or common-law partners of retirees can receive, if they are over the age of 60 but under the age of 65, in the third quarter of 2021 was $1,189.76 per month. This equals to a total sum of maximum GIS and OAS.
Reduction to these benefits (claw back) are $3 for every $4 of basic income of the couple, or 4/3 of the basic GIS payment. On top of that, a reduction of $1 for every $4 of basic income of the couple’s income.
Maximum amount of OAS is $7,517.88 per year, calculated as ($626.49 x 12). Maximum annual income after which Allowance is no longer received is $35,136.
Allowance payments to widows, widowers or survivors of spouses or common-law partners.
Under the condition that they reside in the country for the specified period of time and have a low income under the established standards, surviving spouses of the recipients of the government pension have a right for Allowance as survivors. Allowance for a survivor is payable only until the recipient of the Allowance reaches the age of 65, at which point the Allowance is substituted by the standard government pension (OAS) with guaranteed supplement (GIS). Payment to survivor can end earlier then when the age reaches 65 in the case the survivor enters another marriage or passes away.
There was a mention of a reduction of the amount of social assistance, based on the amount of gross income of the recipient. (Claw back — Reduction to social assistance).
Conditions for reducing OAS (OAS claw back), if the recipient obtains a high income, was introduced in 1989. OAS claw back threshold – is the boundary, upper level of income, which until reached will still qualify for the full amount of payment. In third quarter of 2021 that amount was $79,054. Once a year that amount is indexed to inflation. For an individual, with the total income, including OAS, exceeds established for the year amount of $79,054 (OAS claw back threshold), the government begins reducing OAS payments. If the income of the retired individual exceeds $129,581 per year, the OAS payments stop completely.
Around 5% of retired people receive less than full OAS, and only 2% completely lose OAS. For that reason, discussing reduction to OAS is not very important, more important is to discuss reduction to supplements. In order to understand whether your supplements will be reduced or not it is important to meet with a specialist.
OAS is taxable, GIS and the Allowance are not.
Your OAS pension is taxable and has to be declared on your Income Tax Return annually. Guaranteed Income Supplement (GIS) and Allowance are not taxable but you still have to report it on your tax returns.
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 country of your residence. Your pension may also be subject to Canadian income tax.
OAS pension is protected from inflation.
OAS pensions, the GIS and the Allowance are adjusted for inflation every January, April, July and October. This helps you keep up with increases in the cost of living. You can find out what the current rates are by visiting www.servicecanada.gc.ca or by calling a toll-free number.
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.
OAS pension is not applied automatically – an application has to be submitted to begin receiving OAS.
To begin receiving OAS pension, a person has to submit an application to the Social Program department of Human Resources Development Canada. If the application is submitted by the applicant after the age 65, it can be approved with a retro payment but only for a period of one year. 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 postpone receiving your OAS pension up to a period of 60 months (5 years) after you begin to be qualified to receive it. The amount of pension increases every postponed month by 0.6% and can reach a maximum increase of 36% by the age 70.
If you decide to postpone receiving OAS, you will not be able to collect Guaranteed income Supplement (GIS), your spouse or partner will also not be receiving the Allowance until you begin collecting OAS pension.
You can receive the application form by copying it from the website or by ordering it over the phone.
CANADA PENSION PLAN
The Canada Pension Plan (CPP) 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. CPP program was introduced in 1966 and was initially designed to replace 25% of person’s income during the retirement.
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 the person die.
Your CPP contributions are based on earnings between a minimum and maximum amount. For example, in 2021, you paid contributions only on earnings between $3,500 and $61,500.
The minimum amount of $3,500 has not changed in many years, while the maximum amount from which the CPP deductions are made, increases annually to adjust for inflation.
Changes to minimum and maximum income levels in recent years:
| Year | Minimum income level | Maximum income level | |
| 2021 | $3,500 | $61,500 | |
| 2020 | $3,500 | $58,700 | |
| 2019 | $3,500 | $57,400 | |
| 2018 | $3,500 | $55,900 | |
| 2017 | $3,500 | $55,300 | |
| 2016 | $3,500 | $54,900 | |
| 2015 | $3,500 | $53,600 | |
Beginning in 2019 Canadian Pension Plan program has introduce major modifications and most important focus was on replacing one third of an individual’s income and not just 25% as before.
Increasing the pension amount requires larger deduction into the program and over 5 years, from 2019 to 2023, deductions into CPP will increase significantly.
This can be seen in the table below:
| Employee Contribution Rate | Employer Contribution Rate | Combined Rate | |||||
| Current | Phase-in | Total | Current | Phase-in | Total | ||
| 2019 | 4.95% | 0.15% | 5.10% | 4.95% | 0.15% | 5.10% | 10.20% |
| 2020 | 4.95% | 0.30% | 5.25% | 4.95% | 0.30% | 5.25% | 10.50% |
| 2021 | 4.95% | 0.50% | 5.45% | 4.95% | 0.50% | 5.45% | 10.90% |
| 2022 | 4.95% | 0.75% | 5.70% | 4.95% | 0.75% | 5.70% | 11.40% |
| 2023 and future years | 4.95% | 1.00% | 5.95% | 4.95% | 1.00% | 5.95% | 11.90% |
During years 2024 and 2025 the government will be increasing maximum CPP deductible income level by 14%.
This increased amount will be assigned with a specific deduction rate of 8% (4% to the employer and 4% to the employee). In year 2024 the deductions will only be required from half of the increased amount, and in 2025 the deductions will have to be taken from the full amount.
| Year | Increase in Maximum Pensionable Earnings | |
| 2024 | 8.0% | There will be a 14% increase in maximum pensionable earnings. In 2024, only 50% of this increase will be subject to premiums. For earnings between the YMPE and YAMPE, the employee and employer will each pay premiums of 4%. |
| 2025 | 8.0% | In 2025, the remainder of the increase in maximum pensionable earnings will be subject to premiums. |
Let’s see how the deductions are done today.
For example, Mr. Ivanov earns $27,000 in year 2021. His income for the purpose of deductions will be $23,500 ($27,000 – $3,500). The employer is reducing the income by deducting an amount of 5.45% (($27,000 – $3,500) x 5.45% = $1,280.75) and also makes the same contribution into CPP, equaling 5.45% of income, used to calculate pension.
Another example: income of Mr. Petrov in 2021 was $82,000. Deductible income, from which the CPP will be paid will be $58,000 ($61,500-$3,500). 5.45% of this amount will be $3,161.
If Mr. Sidorov – is a private contractor, he will be acting as both the employer and the employee and will be paying both portions which is 10.90%. Mr. Sidorov, after earning N dollars, as a self-employed will be deducting all the business expenses and will be left with amount left to be taxable in the amount of $82,000. From this income he will be paying ($61,500 – $3,500) x 10.90% = $6,322.
Typically, all employed Canadians over the age of 18 pay into CPP and are entitled to the payments.
Exact amount of payments depends on how long and how much was contributed into the fund.
Overview of CPP contributions and benefits for the year 2021.
| Contributions (in dollars) | Per year |
| Maximum income level | 61,500.00 |
| Minimum income level | 3,500.00 |
| Rate, contributed by the employer | 5.45% |
| Rate, contributed by the employee | 5.45% |
| Maximum contributions for a full-time employee | 3,161 |
| Maximum contributions for independent employee (self-employed) | 6,322 |
| Maximum benefits (in dollars) | Per month (2021) | Per year (2021) | |
| CPP pension at age 65 | 1,203.75 | 14,445.00 | |
| Basic assistance for a person unable to work | for a contributing individual | 510.85 | 6,130.20 |
| for financially dependent children | 257.58 | 3,090.96 | |
| Benefits for widows/widowers | age 65 and older | 650.72 | 7,708.64 |
| until age 65 with a financially dependent child | 650.72 | 7,708.64 | |
| for financially dependent children | 257.58 | 3,090.96 | |
| Amount, paid in case of death | Up to 2,500.00 (lump sum payment) |
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The information in this table is taken from a government website http://www.esdc.gc.ca/en/cpp/benefit_amount.page.
In year 2021 maximum amount of CPP pension was $1,203.75 per month, if the payments started at age 65.
During your employment years there may be years with lower income or maybe years with no income at all. This is supposed to lower the CPP benefits due to lower contributions, made during this time, however, this does not happen, as CPP excludes 15% of the lowest income years when calculating the pension. Time taken, in lieu of employment, to raise children under the age of 7 can also be excluded during calculations. These conditions guarantee that the pension is not reduced due to a few low-income years.
Age, at which you retire has a significant affect.
The normal age when 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. (As of year 2012, retirees do not have to leave their employment to begin receiving pension). If you retire earlier, pension will be reduced by 0.6% every month until you reach 65. For example, if you retire at age 60, you will receive 64% of the full amount (100% – (0.6% x 12 months x 5 years)), if however, you retire later, this increases the pension by 0.7% for every worked month past the age 65 – up to age 70.
Monthly CPP pension is recalculated to adjust for inflation every January, in order to bring it to par with increasing cost of living.
Your CPP pension is taxable and has to be declared in your income tax annually.
Pension, used by those living with spouses.
You and your spouse can calculate your pensions together if you both are at least of age 60 and have requested pension. As a result, this can decrease individual income tax, you need to apply for an application for a permission to calculate joint pension. For example, somebody has pension of $800 and the spouse only has $400. It is possible to include a correction and recalculation in a way that each would receive approximately $600. In this case, it is likely that you will pay less taxes. In such cases, the recalculations are done using a specific formula which includes number of years spent together etc.
You can receive your CPP pension regardless of where you reside. CPP is not applied automatically and an application for CPP pension should be submitted at least 6-11 months prior to when you plan to start receiving it. Application form can be found on www.servicecanada.ca or ordered by telephone.
Each year, CPP 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 dependants could receive if you became disabled or died. Your statement is a very useful financial planning tool.
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.
If you need help understanding your CPP Statement of Contributions, visit www.servicecanada.ca or call CPP toll-free number. You should advise CPP immediately if you find any errors or if you do not receive your statement.
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 you 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 www.servicecanada.ca or call CPP toll-free number 1-800-277-9914.
Information on the third level of Canadian Retirement Income System can be found in articles Group RSP and RRSP.
The above information was taken from Human Resources Development of Canada “Canada’s Retirement Income System. What’s in it for you”.