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Canada Pension Plan vs. Old Age Security

2012-02-03 | 11:52:44

The federal government has sought to assure Canadians that their pensions are secure after Prime Minister Stephen Harper suggested last week that there could be changes coming to Old Age Security benefits.

On Monday, Harper revisited the issue and said the government would not cut the OAS, but would examine challenges facing the country's retirement income system.

"We will ensure our vital programs are sustainable in the long-term and for future generations," Harper said.

"The reality is that we aren’t cutting programs for seniors."

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 a look at OAS and the CPP and how they differ.

What is OAS?

The Old Age Security pension is a monthly payment available to Canadians aged 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.

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 was $508.35 in the last quarter of 2011. The maximum payout for the first quarter of 2012 is $540.12.

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 2011, for example, if you were retired but had an income of more than $67,668 (from things like pensions and personal investments), the government would reclaim part of your OAS payment - 15 cents for every dollar of income that you had above the $67,668 threshold. That means that if you were retired with an annual income of around $110,000 or more in 2011, your OAS payout would 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 you 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 appying 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 eligibilty 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.

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 three types of CPP benefits: disability benefits, retirement pension and survivor benefits. For the purposes of clarity, this article focuses on retirement pension form of CPP.

The average monthly CPP benefit in 2011 was $512.64. The maximum payment in 2012 is $987.67. 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.

A person can begin receiving CPP anytime after age 60 if they stop working or reduce their income, although they incur a financial penalty by doing so. In 2012, a person receiving CPP early will be subject to a 0.52 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 2012, that increase works out to 0.64 per cent per month and will rise to 0.7 per cent next year.

When should you 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.

Similar to OAS, a person can receive retroactive payments covering up to 12 months if they delay applying for CPP until after their 71st birthday.

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 2012, it is $50,100), and there is a basic exemption amount of $3,500. For 2012, that brings the maximum employer and employee contribution to $2,306.70 each.

Self-employed people must contribute 9.9 per cent of their net business income, with the same $50,100 cap and $3,500 basic exemption, bring their maximum CPP contribution for 2012 to $4,613.40.

Anyone earning less than $3,500 is automatically exempt from CPP contributions.

CBC – Wed, 1 Feb, 2012

At age 70, a person stops contributing to CPP even if they continue working.

Cutting OAS costs necessary for future fiscal health of government: Flaherty

2012-02-03 | 11:45:56

OTTAWA - The federal government considers it imperative to cut the costs of public pensions and intends to propose future reforms in the budget, Finance Minister Jim Flaherty says.

Battling an increasingly fierce opposition, the minister made clear Thursday that costs to the Old Age Security program that pays an average $500 a month to Canadians upon turning 65 need to be reined in as baby boomers begin to retire.

"This is not an issue that can be ignored unless we want to put at risk the fiscal track of the country, which would be a mistake," he told reporters Thursday in a free-ranging conference call from Tel Aviv, where he has been visiting for most of the week.

Flaherty also gave a thumbs up to the federal bank regulator's efforts to curb speculation in the Toronto and Vancouver condo markets and loose lending practices.

Documents made public earlier this week from the Office of the Superintendent of Financial Institutions suggested the regulator had detected some institutions may be loosening standards on mortgages and home equity loans.

OSFI has advised financial institutions it is stepping up monitoring on their practices.

Flaherty said he was aware of OFSI's actions and was satisfied the problem is being resolved.

"I was informed of what their assessment showed with respect to a few financial institutions, which is a matter of concern. That is being corrected," he said.

But the battle over OAS is unlikely to go away any time soon. The issue again dominated question period Thursday with both parties hammering away the government for proposing a cut to its pension commitments after having stayed silent on its plans during last spring's campaign.

Liberal Leader Bob Rae goaded Prime Minister Stephen Harper with suddenly discovering the problem of the aging baby boomer generation.

And NDP critics pressed Harper to explain why the government's own commissioned analysis praised the OAS and the Guaranteed Income Supplement as a "very effective safety net for old age incomes" while judging the programs "financially sustainable."

"There will not be a cent cut from pensioners or from those who are approaching retirement," Harper responded. "At the same time, we will ensure that our programs are viable for future generations."

The lack of specifics on how Ottawa intends to proceed has led to speculation it may be preparing to back down in the face of the opposition, which is also coming from senior citizen organizations.

Two previous governments — one Tory and one Liberal — had also previously announced intentions to rein in pension benefits only to turn tail over fear of a voter backlash.

In media interviews Wednesday and Thursday, Flaherty has been unclear whether he intends to lay down a specific proposal such as increasing the age of eligibility to 67, or merely announce a study of how growth in the programs can be curtailed.

The only certainty is that whatever route Flaherty takes, it will not go into effect this year and will not impact current beneficiaries.

Flaherty did not use the word unsustainable to describe the government-funded pension programs Thursday, but said they would pose a challenge for future governments if costs are not trimmed.

"The research we have, both within and outside government, has shown us for some time that the demographic challenge will bring substantial pressure on the long-term sustainability of these programs," he said.

Experts has cast doubt on just how much of a drain pensions are for the government. Ottawa faces a much more difficult challenge with health care transfers, but in December moved to tie rising expenditures to economic growth plus inflation.

Ottawa estimates the cost of OAS will rise from $36 billion in 2010 to $108 billion in 2030.

But as a slice of gross domestic product, or the size of the economy, OAS remains a tiny fraction. It will only increase from the current 1.8 per cent to 2.5 per cent in 20 years. Adding in the Guaranteed Income Supplement that goes to the poorest of Canadians brings the total cost to 3.2 per cent of GDP in 2030.

An analysis commissioned by the government concluded there is "no pressing financial or fiscal need" to raise the age of eligibility.

Canadians will have to wait until the budget to see what Ottawa plans, Flaherty said.

In another key measure of the budget — cutbacks to spending — Flaherty said the special committee of the Treasury had concluded its work on the three-year austerity program announced last year and that Finance officials are studying the recommendation.

In the 2011 budget, Flaherty said the government was looking to cut at least $4 billion from departmental discretionary spending in the next three years, but Treasury Board President Tony Clement has suggested cuts could total $8 billion.

By Julian Beltrame, The Canadian Press | The Canadian Press – 20 hours ago

Canadian dollar advances on better than expected U.S. employment report

2012-02-03 | 11:36:14

Canadian investors shut out of Facebook IPO

2012-02-03 | 11:32:37

Canadian Facebook fans are unlikely to share in the excitement of the social media giant's hotly anticipated initial public offering.

That's because only the biggest Canadian players have accounts with the social media company's underwriters, who are responsible for doling out shares to investors.

Investment advisors, who usually receive fewer shares than they want of a stock that's in high demand, then distribute those shares among their clients.

By the time Facebook shares actually hit stock exchanges, the price is expected to at least have doubled from the initial asking price.

Facebook hopes to raise about US$5 billion in its IPO when the company sells a small piece of its business to the public. The offering is expected later this year.

The entire California company could be valued at US$100 billion or even more, depending on the market reaction to its stock sale.

CBC – Thu, 2 Feb, 2012

Home & Office electronic Deals !

2012-02-03 | 11:24:09

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ECB chief Draghi speaking in Davos

2012-01-27 | 10:22:45