Canada Pension Plan vs. Old Age Security - the differences explained
The 2 retirement benefit programs are often confused
In his 2012 budget, Federal Finance Minister Jim Flaherty told people currently younger than 54 that they'll need to wait a bit longer than expected for Old Age Security benefits to kick in.
The budget outlined provisions to gradually raise the age of eligibility for Old Age Security benefits to 67 from 65. The effects of the changes will start to be felt in April 2023, and the transition will be complete by Feb. 1, 2029. This means they'll affect the Old Age Security benefits that will eventually be received by those born after April 1, 1958.
People who choose to work longer will be able to defer their OAS for up to five years, giving them a higher pension later in life. And the government will start enrolling seniors automatically for OAS and the guaranteed income supplement (GIS), rather than making them apply, a move the NDP suggested in March 2012.
The changes made good on hints Prime Minister Stephen Harper started dropping in early 2012 that the government was looking to reform OAS.
"We will ensure our vital programs are sustainable in the long-term and for future generations," Harper said in a speech in late January.
Apart from private money squirreled away in an RRSP or other savings vehicles, the OAS and complementary Canada Pension Plan are key components in the retirement planning of many Canadians. But many people confuse the two programs, how much they pay and who's eligible for them.
Here is how the OAS and the CPP differ.
Old Age Security
What is OAS?
The Old Age Security pension is a monthly payment available to Canadians age 65 and older who apply and meet certain requirements. Unlike CPP, it is not dependent on a person's employment history and a person does not need to be retired from a job to qualify for it.
The government adjusts the OAS payment every three months to account for increases in the cost of living according to the Consumer Price Index. The average monthly amount as of October 2012 was $514.56. The maximum payout for the first quarter of 2013 is $546.07, according to Service Canada.
There are also supplementary programs, including the Guaranteed Income Supplement, which provide additional income to low-income seniors.
The government claws back OAS payments from high-income Canadians. In 2013, if you are retired but have an income of more than $70,954 (from things like pensions and personal investments), the government will reclaim part of your OAS payment — 15 cents for every dollar of income above the $70,954 threshold, which is adjusted annually for inflation.
That means that if you are retired with an annual income of $114,640 or more in 2013, your OAS payout will be reduced to zero.
Who is eligible?
OAS is available to Canadian citizens and legal residents living in the country who have spent at least 10 years in Canada after they turned 18.
It is also open to people outside of the country who were Canadian citizens or legal residents on the day they left the country, as long as they spent at least 20 years of their adult life in Canada.
When should I apply?
A person should apply for OAS six months before they turn 65. If you have not lived in Canada continuously or were not born in Canada, the government requires a statement containing all the dates when you entered and left the country. It may also ask for supporting documentation.
If a person applies after age 65, they can receive up to 11 months in retroactive payments along with a payout for the month in which a person applies to receive OAS. So if a person applied after their 66th birthday, they would receive 12 months of OAS payments.
How is the rate calculated?
In order to qualify for a full pension, a person must have lived in Canada for at least 40 years after turning 18. People also qualify if they reached the age of 25 on or before July 1, 1977, and either lived in Canada, had some residency in the country after age 18, or held a valid Canadian immigration visa and spent the 10 years immediately before applying in Canada.
For those who do not qualify for a full pension, a partial amount is paid out based on the number of years spent living in Canada. For instance, if a person has spent 36 years of their adult life in the country, they will earn 36/40th of the full OAS amount.
Based on the eligibility requirements, the minimum payout is one-quarter of the total, to account for a total of 10 years spent in Canada.
Once a partial pension has been approved, the percentage of the total OAS pension received will never increase even if a person spends more years in Canada.
Canada Pension Plan
Maximum monthly CPP benefit rates for 2013
- Retirement pension: $1,012.50
- *Post-retirement benefit: $25.31
- Disability pension: $1,212.90
- Survivor's pension (under age 65): $556.64
- Survivor's pension (65+): $607.50
- Disabled or deceased contributor's child benefit: $228.66
- Death benefit (one-time payment): $2,500.00
*2013 is the first year that this new benefit will be paid out. See sidebar below for details.
Annual contribution rates for 2013:
- Maximum pensionable earnings: $51,100
- Basic exemption amount: $3,500
- Maximum employee/employer contribution: $2,356.20 each
Source: Service Canada
What is CPP?
The Canada Pension Plan is a form of retirement income that is open to all Canadians who have worked and paid into the system through deductions from their paycheques. The amount a person receives under the system depends on how much and for how long a person contributed, along with the age at which a person started receiving CPP payments.
There are four types of CPP benefits: disability benefits, retirement pension, survivor benefits and post-retirement benefits (introduced in 2012). For the purposes of clarity, this article focuses on the retirement pension form of CPP.
The average monthly CPP benefit as of October 2012 was $528.49. The maximum payment in 2013 is $1,012.50. The government adjusts the CPP rate every January to account for changes in cost of living as measured by the Consumer Price Index.
According to Service Canada, "If you have lived and worked in Canada most years between age 18 and 65 and earned about the average Canadian wage ($39,100 in 2002), at age 65 you would receive a CPP retirement pension of about $788 a month."
Who is eligible?
Anyone who has made at least one payment into CPP is eligible for benefits once they reach the age of 65, but the size of the benefits depends on how much and for how long a person contributed into the plan and at what age they start receiving benefits.
The government began phasing in a series of changes to the Canada Pension Plan in 2011, including higher penalties for taking an early pension and bigger benefits for waiting until after 65 to collect. In 2013, the phasing in of those changes continues. This year, your CPP payout will be reduced by 0.54 per cent for each month before 65 that you receive it, compared to 0.52 per cent in 2012. For each month after age 65 that you wait to collect, your benefit will increase by 0.70 per cent, for a maximum increase of 42 per cent for those who start receiving a pension at age 70 (in 2012, the increases were 0.64 per cent and 38.4 per cent, respectively).
2013 is the first year that the post-retirement benefit will be paid out. As of 2012, those who start receiving CPP or Quebec Pension Plan benefits before age 65 and continue working (outside Quebec) must contribute to the pension plan. Their contribution, equal to 4.95 per cent of pensionable earnings and which must be matched by the employer, is paid out in the following year in the form of the post-retirement benefit, which is a fully indexed lifetime benefit separate from the regular CPP and QPP benefit. For those between 65 and 70, the contribution is voluntary.
A person can begin receiving CPP anytime after age 60, although they incur a financial penalty by doing so. In 2013, a person receiving CPP early will be subject to a 0.54 per cent reduction for each month before the age of 65 that they received payments. That number is slated to rise to 0.6 per cent each month in 2016.
On the other hand, if a person chooses to delay CPP payments they receive a similar increase for each month they wait between the age of 65 and 70. In 2013, that increase works out to 0.70 per cent per month.
When should I apply?
This is really up to the individual and whether they want to receive a smaller or larger CPP benefit. However, the government recommends applying six months before a person wants their pension to begin.
Canadians can apply online or print out an application and deliver it to a Service Canada location.
A person can receive retroactive payments covering up to 12 months if they didn't apply to have CPP benefits begin immediately when they turned 65.
How much do I contribute to CPP?
An employed person's annual contribution to the CPP is the equivalent of 9.9 per cent of their total pensionable income, half of which is paid by the employee and half by the employer. Annual pensionable earnings are capped at a maximum that is adjusted each January (for 2013, it is $51,100), and there is a basic exemption amount of $3,500. For 2013, that brings the maximum employer and employee contribution to $2,356.20 each.
Self-employed people must contribute 9.9 per cent of their net business income, with the same $51,100 cap and $3,500 basic exemption, bring their maximum CPP contribution for 2012 to $4,712.40.
Anyone earning less than $3,500 is automatically exempt from CPP contributions.
At age 70, a person stops contributing to CPP even if they continue working.