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Canada's Retirement Income
System
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There are three levels to Canada's retirement income system:
government-funded, CPP/QPP, and privately managed. OAS is
a government-funded plan, CPP/QPP are publicly managed and
based on employer/employee contributions, and privately managed
pension plans like RRSPs are funded by private employers and/or
by individuals. Here's how they work:
Old Age Security (OAS) benefits are a modest income paid out
monthly to most Canadians over the age of 65 regardless of
their employment history. OAS is paid out of the federal government's
income tax revenues. These basic OAS benefits are taxable
income and are also reduced (clawed back) for those with higher
incomes. At a certain level the benefits disappear entirely.
OAS has two other plans geared to low-income Canadians:
| GIS -
Guaranteed Income Supplement (GIS) is a benefit within
the OAS program paid out to low and modest-income seniors.
Marital status is a consideration. GIS benefits are not
high enough to pull anyone out of poverty. GIS is non-taxed
income. Benefits are reduced according to any income other
than basic OAS.
The Allowance - The Allowance
is a benefit paid to low and modest-income people aged
60-64 whose spouse is over the age of 65 and receiving
OAS as well as GIS There is also an Allowance for
Survivors paid out to spouses aged 60-64 of people
who have died but were receiving OAS and GIS These Allowances
are not taxed income. Both Allowances are also reduced
according to any other income.
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All three parts of the OAS system are protected against inflation
by regular cost-of-living adjustments. It is worth understanding
that current adjustments are by reference to price
inflation and not income
inflation. Basic OAS was adjusted for income inflation until
1974, and GIS benefits were adjusted similarly until 1985.
Nearly all Canadians contribute to the Canada Pension Plan (CPP)
or the Quebec Pension Plan (QPP) at some point in their lives.
CPP is Canada's major public pension plan and is funded entirely
by employee and employer contributions and by earnings generated
when these are invested. Government sets the laws for CPP/QPP
but they do not manage or contribute to it except as all employers
do. The amount you receive when you retire depends on how much
you put in; this is based entirely on your employment history
(how much you worked, how much you got paid while working.)
While CPP is not intended to provide Canadians with all their
old-age income needs, it does provide a modest base up to a
maximum allowable amount. This maximum is set by an annual limit
to income on which you can contribute and a percentage replacement
of this income. CPP is taxed income.
CPP is an insurance plan as well as a retirement income plan.
Fully 38% of paid benefits go to survivors, orphans, and the
disabled; the other 62% pays retirement income. CPP benefits
are also fully protected against price
inflation but not against income
inflation.
Women should be aware that CPP/QPP benefits are far more important
to them than to men. This is because women are less likely to
have other good pension plans and because of the insurance features
mentioned above.
Members of CPP/QPP should be aware that there are political
and financial groups who have always opposed such a public plan,
and that its survival depends on political will. In the late
1990s there were serious proposals to reduce or eliminate the
plan. Strong support for CPP/QPP ensured that contribution rates
were raised to guarantee its on-going operation.
Many Canadians rely on private pension plans (often called occupational
or employer-based plans) to provide a large part of their retirement
income. Private pension plans range from these employer-based
plans to RRSPS and mutual funds purchased by individuals. Employer-based
plans work best in the "traditional" work environment
of long service with one employer or group of employers, an
experience foreign to many women. Because of this many women
rely on individual plans such as RRSPs.
RRSPs
RRSPs are specifically useful for women because they are
independent of a pension plan and often what women need
to replace the pension plan the workplace doesn't have.
They are easy to manage and the numbers are straightforward.
Because they are so important for women we have chosen
to explain them in some depth.
An RRSP can contain any number of
investments including stocks,
bonds,
GICs,
and mutual
funds. What makes an RRSP an RRSP is its registration
with an RRSP umbrella for tax treatment. An RRSP is
not actually an investment
itself but rather an umbrella sheltering all of the
investments which you have chosen to place there.
Putting money into an RRSP has major
tax benefits. It gives you a deduction at the time of
initial investment (or transfer of other investment
to an RRSP) and delays income tax on both the
investment and earnings on it until you remove the money,
perhaps forty years later. When putting money into RRSPs
most people only consider the first deduction, whereas
the second deduction is actually the most significant
as it is much longer-term.
At age 69 Canadians are required
to either cash in their RRSPs or transfer them to a
Registered Retirement Income Fund (RRIF). A RRIF has
all the same functions of an RRSP except that you may
no longer add money to it and must now start taking
money out at required minimum rates each year. RRSPs
are savings programs but RRIFs are not. RRIFs do not
really start functioning until pay-out time; it is better
to think of them as successors to RRSPs rather than
as alternatives. There are other successors of annuities
or cashing out but these days RRIFs are the most popular
because of their flexibility.
The two most basic rules of RRSPs
outweighing most of the other advice are:
- put the money in as early as
you can
- leave it in as long as you can
Canadians should count themselves
fortunate to have available the vehicle of RRSPs as they
are superior to many plans in other countries. |
Many thanks to Murray Smith for insight
and assistance.
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