photo: Kevin Timothy
Retirement is a big uncertainty for many in the United States, study after study showing dismal average 401(k) balances and predicting a bleak future for Social Security benefits.
North 0f the border, things are different. In Canada, there are two paycheques you can receive from the government in retirement: Canada Pension Plan (CPP) and Old Age Security (OAS). Most Canadians will receive these cheques so when it comes to retirement planning, it is very important to be aware of how these programs work and how much they pay.
Canada Pension Plan
Technically, CPP is not really a government benefit. Instead, it is a defined benefit plan that is mandatory for all working Canadians between the age of 18 and 65. When you work and earn an income, you must contribute to CPP and the employer must also contribute to CPP.
The amount you get in retirement is really dependent on how much you contribute during your working years. Currently the maximum CPP available in retirement at age 65 is $960.00 per month, or $11,520 per year.
You can collect CPP early
Although the normal age of the CPP retirement benefit is age 65, you can collect CPP as early as age 60 but at a reduced amount. For any years prior to 2012, the reduction is 0.5% for every month prior to your 65th birthday. After 2012, the new CPP rules come into effect and you will face a reduction of 0.6% for every month prior to your 65th birthday.
Don’t count on the maximum
Remember that your retirement benefit is based on the amount of contributions you had while you were working. The average amount of CPP being paid out is only $504.50 per month. In other words many people do not get the maximum CPP. The best way to determine your CPP amount is to simply call Service Canada at 1-800-277-9914. Here’s a more detailed explanation of how to determine how much you will get from Canada Pension Plan.
Old Age Security
Old Age Security is a monthly paycheque that comes directly from the government. Unlike CPP, this program is funded directly out of general tax revenues.
OAS is very different than CPP:
- You cannot collect the benefit prior to age 65
- The amount you get is based on residency and not contributions. To qualify for the maximum, you need to be resident of Canada for 40 years between the age of 18 and 65.
- The maximum OAS is currently $524.23 per month.
- You can lose some of your OAS if your income is greater that $67,668. If your income exceeds $109,607 you will lose all of your OAS.
In addition to the basic OAS pension, low-income seniors may qualify for other retirement benefits such as the Guaranteed Income Supplement (GIS) and the Allowance. The threshold for low income depends on whether you are single, married or widowed. Few people qualify for the maximum GIS.
The rules for government benefits are not easy to understand. For more information, contact Service Canada.
Jim Yih is a financial speaker, fee only advisor and the man behind RetireHappyBlog.ca. For the past 20 years, he has written extensively about retirement, government benefits and personal finance.