Old-Age Pension

Old-Age Pension

The old-age pension is a government initiative to help Canadians avoid poverty in retirement. It has changed from a strictly anti-poverty measure, that often humiliated the elderly, into an accepted, mainstream aspect of post-work life. Some fear the system is unsustainable and heading toward bankruptcy, while others argue it is financially sound.

The Old Age Security Act

The first old-age pension was enacted by the federal parliament in 1927. It was jointly financed by federal and provincial governments but administered by the provinces, as pensions were considered a provincial constitutional responsibility at that time. The plan paid up to $20 per month, depending on other income and assets, and was available to British subjects 70 years of age and older with 20 years of residence in Canada. A strict means test was applied and was widely regarded as humiliating.

In 1951, following an amendment to the British North America Act to permit the federal government to operate a pension plan, the Canadian Parliament passed the Old Age Security Act, which provided a universal pension, or demogrant, of $40 per month financed and administered by the federal government. All Canadians aged 70 and over who could meet the more liberal residence requirements were eligible, regardless of their other income or assets. Pension payments began in 1952 and were taxable.

A second piece of legislation enacted at the same time, the Old Age Assistance Act, provided a pension of $40 per month to retired Canadians aged 65-69. This program was cost-shared by the federal and provincial governments on a 50-50 basis and administered by provincial welfare departments, who used a needs test to determine eligibility. The elderly often saw the test as personally invasive and stigmatizing.

The Canada Pension Plan

The universal Old Age Security pension had been raised to $75 per month by 1964, but it was widely acknowledged as inadequate. To alleviate this problem over the longer term, the federal government (after a further amendment to the BNA Act) introduced the Canada Pension Plan in 1965, while Québec launched its own scheme, the Quebec Pension Plan, similar in all significant aspects to the CPP.

The Canada/Quebec Pension Plan (C/QPP), a compulsory social insurance program which became effective in 1966, covered 92% of the labour force. Employees and employers were required to contribute toward a wage-related retirement pension at 65, as well as long-term disability and survivor's benefits, together with a lump-sum death benefit to defray funeral costs. The maximum retirement benefit was designed to replace 25% of the average industrial wage. The C/QPP was also open to the self-employed and was fully portable anywhere in Canada.

The Guaranteed Income Supplement

As the C/QPP would not pay full retirement benefits for 10 years, and to assist those low-income seniors already retired, the federal government, through an amendment to the Old Age Security Act, introduced a tax-free, income-tested supplement beginning in 1967. It was available to pensioners in receipt of the Old Age Security Pension, but who had little or no other income. This supplement was applied for every year at tax-filing time and was free of any social stigma. For every $2 of income over and above the OAS pension, the supplement was reduced by $1. At the same time, the age of eligibility for universal OAS pension was lowered over five years from age 70 to age 65, thus eliminating the means and needs test from the federal pension system.

Although the Guaranteed Income Supplement (GIS) was initially seen as a transitional program to be phased out when the C/QPP began paying full benefits in 1976, it was found that a sizable portion of C/QPP beneficiaries qualified for less than a maximum pension. This, coupled with the fact that only a minority of workers had an employer-sponsored pension, meant that the GIS remained a critical element in reducing the incidence of poverty among the elderly. Thus the program was maintained, increased in value and indexed quarterly to the cost of living.

Spouse's Allowance (1975, 1985)

In 1975 the OAS/GIS was improved for a small proportion of the population by a Spouse's Allowance (SPA), which provided an income-tested supplement to low-income elderly couples where only one person receives the OAS/GIS and the other is between 60 and 64 years of age. In 1985 the program was extended to low-income widows and widowers between the ages of 60 and 64 whose spouses had been recipients of OAS/GIS.

Debating Pension Reform

Old-age pensions became a topic of ongoing national concern starting in the mid-1970s, chiefly because of high inflation rates and their effect on fixed incomes. A federal Green Paper (1982) identified the two goals of the Canadian pension system as ensuring elderly persons a minimum income (the anti-poverty objective) and maintaining a reasonable relationship between the individual's income before and following retirement (the income-replacement objective). The universal OAS pension, together with the income-tested GIS and SPA programs, was designed to meet the anti-poverty objective; income replacement was to be met by the Canada/Québec Pension Plan, plus employer-sponsored pensions and private, individual savings (the latter encouraged by special concessions in the tax system).

While there was general agreement on the need for pension reform, there was no consensus on the direction reform should take. The business community, the private pension industry and the province of Ontario wanted improvements to come mostly from the private sector. The opposing view was that the public pension system should be improved and expanded, particularly the earnings-replacement ratio of 25%. Implicit in this approach was the belief that the 14,000 private pension plans then in existence were, in the words of a Special Senate Committee Report (1979) "grossly inadequate" in coverage, portability, adequacy of pension benefits and survivors' benefits, and protection against inflation. A public sector approach was advocated by labour unions, women's groups, the provinces of Québec and Saskatchewan and welfare groups.

Despite nearly a decade of debate, reports and national conferences, very little substantive change occurred. Some minor improvements in the GIS program and the C/QPP were made and the federal and provincial governments attempted to improve the standards of private pensions, with limited success.

Beginning in 1985, spurred on by their interest in debt and deficit reduction, the federal Conservative government proposed a partial indexing of the OAS benefit to the inflation rate in excess of 3 per cent. The attempt created such a political backlash that the idea was dropped but was successfully carried out against another universal program, family allowances.

Federal policy toward old age pensions at this time appeared to be moving in the direction of limiting the public pension system to the anti-poverty objective; that is, assuring a basic minimum of retirement income, while leaving the income-replacement objective to the private market and to individual responsibility.

RRSPs

In 1957 the federal government introduced changes to the Income Tax Act to encourage self-employed Canadians to provide for their own retirement. Money placed in a Registered Retirement Savings Plan (RRSP) account, as well as investment earnings on the money, are tax-deferred until withdrawn on retirement or earlier. Self-employed professionals were the initial principal beneficiaries of this scheme. In 1973 the program was extended to all Canadians, particularly those without an employer-sponsored pension plan. Although open to all Canadians, the preponderance of funds in RRSP accounts are held by upper-middle class and wealthy Canadians, as they are most likely to have money to invest when all other expenses are paid.

Reform Attempts in the 1990s

When the Liberals formed the government in 1993, they also confronted the need to reduce the federal debt and deficit. The government argued that because of the aging of the Canadian population the number of seniors would more than double in Canada by 2030. Therefore some adjustment in pension arrangements was needed if the system was to remain financially viable. The key according to the government was to target the benefits of those most in need.

In the 1996 Budget Speech the government announced that the OAS/GIS, and two tax credits for seniors, would end in 2001 and rolled into a monthly tax-free payment to be called the Seniors Benefit. Under this new program the government said the vast majority of seniors would be as well or better off— that 75 per cent of single seniors and couples would receive the same or higher benefits, and nine out of 10 single senior women would be better off. Furthermore, Canadians aged 60 and over and those already on pensions would have the option of staying with the current system or choosing the Seniors Benefit. This proposal never materialized.

In the 1997 budget, the government announced that it would introduce income testing, which would result in increased benefits to seniors who qualified and would claw back benefits for those who exceeded the annual income level. This met with considerable opposition from the business community, who deal with private pension plans. They argued that the proposed plan would penalize those who contributed to private pensions. Again the proposed changes were not implemented.

By 2013, OAS/GIS support continued for seniors.

Changes to the Canada/Quebec Pension Plan

Every five years the federal and provincial governments review the operations of the C/QPP. During the 1990s the CPP was the subject of much gloomy speculation. The aging of the Canadian population, the unexpected increase in disability pensions and the declining ratio of workers to retired persons meant to some observers, notably those associated with the private pension industry, that the CPP was headed for bankruptcy. These observers urged that benefits be reduced, that the age of qualification be raised from 65 to 67 and that the wage-replacement ratio, set at a barely adequate 25 per cent (and only if the worker has a company pension plan to supplement the CPP) be reduced to 22.5%. Again, these proposed changes did not materialize.

In the 2012 federal budget, the Conservative government introduced plans to gradually raise the retirement age for the OAS and GIS from 65 to 67. The change is scheduled to roll out between 2023 and 2029. Anyone born in 1963 or later will be able to receive these benefits starting at age 67.

The government also dealt with budget concerns relating to pension funding by increasing pension contributions, reducing the Death Benefit, and making it more difficult to obtain the Disability Pension. There were others who argued that the talk of bankruptcy was nonsense and was put forward by people with either a political or financial axe to grind, and that contributions would rise as they were predicted to do from the outset. All money contributed to the C/QPP is placed into a fund. At one time, provinces were allowed to borrow this money at a modest interest rate. Recent federal legislation allows for a portion of this money to be invested on the stock market in hopes of increasing the fund. It remains to be seen how successful this investment strategy will be.

See also Social Security.