Canada Pension Plan vs. Old Age Security

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, 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.

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