Many Canadians are eyeing their future and making plans for what their retirement could look like. For some, it will be spending time traveling in Europe and for others it will be spending worry free days at the playground with the grandchildren. Regardless of what that picture might look like for you, retirement is an important milestone, and requires a bit of planning around how you will achieve your desired income.
Some workers will save to help meet their retirement goals but even if you have not specifically set aside savings, it is important to realize that there are government pension programs out there that are available to you. Since the Old Age Pensions Act was first established in 1927, these pensions have changed significantly. Now, just shy of one hundred years later, they can make a meaningful difference to your retirement.
This article will provide a deep dive into the different government pensions in Canada and how they can help you to realize your retirement goals whether that be travel, purchasing a cottage on the lake, or simply being comfortable in your own home.
For those who have worked their whole life, and especially those who have been unable to save, the Canadian Pension Plan (CPP) is a program that was designed for you. Whether you knew it or not, you were paying into this program with your paycheque throughout your entire career. Now, in retirement, it is time to reap the benefits of your hard work.
The CPP issues monthly payments based on your average earnings and the amount contributed to the program. From the age of 18 to 65, employees and employers are required to contribute a specific percentage of earnings, 5.45% for this year, up to the maximum pensionable earnings of $61,600 for 2021. To qualify for maximum benefits, you would need to have contributed the maximum amount each year for 40 years.
Those qualified can begin to receive their CPP payments as early as age 60 or as late as age 70. Those who choose to begin payments before the age of 65, you will receive a decreased amount of 0.6% per month, up to a maximum of a 36% reduction if they start at age 60. Delaying payments to age 70, on the other hand, provides an additional 42% or about 0.7% for each month after age 65.
The maximum monthly benefit for a pensioner in 2021 is $1,203.75. It is worth noting however that the average monthly CPP benefit received by Canadians for January 2021 was $619.75. As you can see, this program is highly dependant on your personal situation including how much you earned and contributed while working. Everyone will receive a different amount based on these factors so, if you think you may qualify for the program, it is best to check on My Services Canada for the amount you can expect to receive.
Unlike CPP, the Old Age Security (OAS) program is based on residency rather than employment. That’s right, you get a pension for simply living in Canada. Beginning at the age of 65, Canadians can receive their OAS pension payments though some choose to defer until age of 70 for a larger benefit.
To be eligible to receive OAS, you must be a legal resident or citizen of Canada and have lived in the country for ten or more years after the age of 18. If you are currently living outside of the country, you may still be eligible if you were previously a citizen or legal resident and were living in Canada for at least 20 years after the age of 18.
The maximum benefit for OAS is achieved when an individual resides in the country for 40 or more years during adulthood and provides a monthly payment of $618.45 in todays dollars.
An important note about OAS is that it is intended to Canadians who have a lower income during retirement. Anyone who has taxable income above a certain amount, $79,054 for 2020, will be subject to OAS clawback and will need to repay 15% of their benefit above that threshold. The repayment amount increases with taxable income until the pensioners income reaches $128,149 when the benefit is fully clawed back. For example, if someone collecting OAS earned $95,000 in taxable income during the 2020 calendar year, they would be required to repay $2,391.90 of their total OAS pension payment back.
For those of us who do not have savings and investments that provide higher taxable incomes during retirement, the Guaranteed Income Supplement (GIS) can be an important benefit. This program goes hand in hand with OAS, and one of the eligibility requirements is that you are currently receiving OAS pension payments. The key difference between the two is that eligibility for the GIS is based on having an annual income below a lower threshold and factors in your spouse’s or common-law partner’s income as well. See below for a detailed chart on the income thresholds and corresponding GIS payments.
| Annual taxable income must be | Maximum Monthly GIS Payment | |
|---|---|---|
| Pensioner is single, widowed, or divorced | below $18,744 | $923.71 |
| Pensioner’s spouse or common law partner has full OAS benefits | below $24,768 (combined) | $556.04 |
| Pensioner’s spouse or common law partner does not have any OAS benefits | below $44,928 (combined) | $923.71 |
A common misconception is that government pensions provide little to no income to retirees, and will therefore not make a meaningful contribution to their retirement income. However, this is not the case - the programs are designed as a social safety net and can make a material difference to those in their retirement years.
For example, someone who qualifies for maximum CPP and OAS benefits would receive $1,822.20 per month ($1,203.75 CPP + $618.45 OAS), or $21,866.40 annually. This can go a long way to meeting retirement income needs, especially when we consider that these pensions are indexed to inflation. This means that the amount received each year will increase over time as goods and services begin to cost more as well.
As Canadians make plans for their golden years, they will need to determine how to fund their retirement goals. Pension programs, including the government run CPP, OAS and GIS, can go a long way in providing retirement income for Canadians. It is essential to understand which programs you qualify for, and how they can work together to provide you a living wage.
