National Approaches Income Support for Nonworkers

Two national programs help protect older Canadians from destitution in old age: (1) the Old Age Security program, which includes the Old Age Security pension (OAS), the Guaranteed Income Supplement (GIS), and the Allowance and Allowance for the Survivor and (2) the Canada Pension Plan (CPP). Canadian law allows the provinces to opt out of the CPP if they offer a similar pension plan. The province of Quebec has chosen this route and established the Quebec Pension Plan (QPP), which is comparable, but not identical, to the CPP.

The Old Age Security pension is a universal monthly benefit available to persons aged sixty-five or older, regardless of employment history, who are either Canadian citizens or legal residents who have resided in Canada for at least ten years since turning age eighteen. The full Old Age Security pension is paid to persons who have lived in Canada for at least forty years since turning eighteen; partial benefits are paid for shorter residency. Benefits, which are financed from general revenues, are paid monthly and adjusted quarterly based on increases in the Consumer Price Index. Pensioners with individual net income above a certain level must repay all or part of the OAS.

The Guaranteed Income Supplement (GIS) is an income-tested monthly benefit paid to recipients of an Old Age Security pension who have little other income. The amount of the GIS depends on marital status as well as income; any money other than the Old Age Security pension is defined as income for the purpose of determining the GIS amount. The GIS is indexed quarterly to reflect increases in the Consumer Price Index. The government bears the whole cost of these benefits, which may be supplemented by income-tested benefits in the provinces.

The Allowance and Allowance for the Survivor may be paid to spouses, partners, including common-law and same sex partners, and survivors. These benefits are based on need and limited to persons between the ages of sixty and sixty-four who have lived in Canada for at least ten years since turning eighteen. These benefits are converted to an Old Age Security pension when a recipient turns sixty-five.

The Canada Pension Plan is an earnings-related pension program that pays full retirement benefits at the age of sixty-five. Early reduced benefits may be paid starting at age sixty; late increased benefits are available up to age seventy. Beneficiaries must have made at least one year of contributions to qualify for this pension. All workers, including the self-employed, between the ages of eighteen and seventy must contribute to the Canada Pension Plan or the Quebec Pension Plan. Benefits between the CPP and QPP are portable.

In 2001, Canadian workers and their employers in both the CPP and QPP each paid 4.3 percent of the worker's earnings up to a maximum, C$38,300, that is indexed to average wage growth. The first C$3,500 of earnings is exempt from taxation; this amount is not indexed. Self-employed workers contribute the employer's and the employee's share. The employer-employee contribution rate is rising to 4.95 percent of wages by 2003, where it is scheduled to remain.

Legislation enacted in 1998 introduced changes that move the Canada Pension Plan from pay-as-you-go financing, where contributions in any one year are largely paid out in benefits that year, to a system with greater funding. Designed to help pay future pension benefits in an aging Canada, the reserves are to be invested in a diversified portfolio of securities, rather than solely in provincial bonds, which was the practice until recently.

The formula used to calculate benefits at the time of retirement in Canada adjusts previous earnings to make them comparable to earnings at the time of retirement. The adjustment is based on the maximum pensionable earnings for the past five years. Up to 15 percent of low-income years may be deducted from the pension calculation, as may be years when someone was caring for a child under the age of seven. The resultant pensions, which amount to about 25 percent of a worker's average monthly earnings over his or her working life, are fully indexed annually.

Spousal benefits are not paid under the Canada Pension Plan. However, survivors' benefits are payable to legally married and common-law survivors. These benefits amount to 60 percent of the spouse's retirement pension, up to a maximum and are reduced for retirement below the age of sixty-five.

The Canada Pension Plan provides credit splitting upon divorce or separation. Based on the premise that marriage or a common-law relationship is an economic partnership, credit splitting acknowledges that both partners are entitled to share the pension credits earned by either partner during their marriage or cohabitation. Upon divorce or separation, pension credits earned during the relationship are combined and divided equally between the partners. Such splitting generally works to the advantage of the lower earner in a partnership, typically the wife, and produces a higher retirement benefit than she would otherwise have received.

Canadian workers may be eligible for disability benefits if they have worked and contributed to the Canada Pension Plan or Quebec Pension Plan for a specified period. To qualify for disability benefits, a worker must have "severe and prolonged incapacity for any gainful activity" (U.S. Social Security Administration, 1999). At age sixty-five, disability benefits are converted to a retirement pension. Access to health insurance is an important component of financial well-being in old age, and virtually all Canadians are eligible for publicly funded health care in Canada.