Changes to CPP Will Reduce OAS Benefits for Thousands: How Can You Help?

Upcoming changes to the Canada Pension Plan are intended to boost retirement incomes, but for many the opposite will be true, a recent report from Canada’s Chief Actuary finds.

The Actuarial Report on the Old Age Security Program — the first such report from the Office of the Superintendent of Financial Institutions to include the estimated impact of additional CPP benefits payable in 2019 — determined that thousands of retirees will face clawbacks to Old Age Security benefits, including the Guaranteed Income Supplement, Allowance and Allowance for the Survivor.

“It is expected that as the additional CPP benefits grow over time, an increasing amount of CPP income will be included in the determination of program benefits and, as such, lower numbers of recipients and amounts of benefits will result than would otherwise be the case,” wrote chief actuary Jean-Claude Ménard in the report.

He goes on to explain that without the CPP enhancements, 27.2 per cent of retirees would receive GIS in 2060, at a cost of $49 billion, or 0.53 per cent of GDP. However, when the additional CPP benefits are included in the projections, just 25.3 per cent of retirees would qualify for GIS (a reduction of 6.8 per cent or 243,000 fewer beneficiaries), with the cost going down to $46 billion or 0.49 per cent of GDP, a government savings of $3 billion.

The Guaranteed Income Supplement, a tax-free supplement to low-income recipients of the Old Age Security pension, is paid to seniors whose income (not including OAS) is less than about $17,700 (indexed quarterly) for single seniors and up to approximately $42,400 for couples where both are GIS recipients (but only one receives OAS). Any additional income — including CPP benefits — earned by the recipient (or spouse) will reduce the supplement they receive by 50 per cent of the additional income, until their supplement is reduced to zero.

CPP, on the other hand, is a mandatory contributory, earnings-related social insurance program. Contributions to the plan are based on pensionable earnings and are shared equally between the employer and employee (except in the case of self-employed individuals, who must pay both the employer and employee premiums). The benefits received are based on the premiums paid into the plan.

Beginning in 2019, enhancements will be made to the Canada Pension Plan. The enhancements will increase the pension available to the current generation of workers from the current 25 per cent of pensionable earnings to 33 per cent of pensionable earnings.

Accordingly, the premium rate will increase annually over the period 2019 to 2023. Then, in 2024, the basic rate will remain the same but an additional premium will be required on the next $4,800 over the maximum pensionable earnings. In 2025, that premium would be on the first $10,200 over the maximum pensionable earnings. The premium rate on these enhanced pensionable earnings will be 4 per cent. This additional premium would be paid by both the employer and the employee. The additional premiums will be tax deductible (rather than a non-refundable credit).

So how can you help? As these changes come into effect, financial advisors will need to marry tax and financial planning competencies to help clients adequately fund tax-efficient retirement income requirements — paying particular attention to public pension planning options, the integration of work life into retirement life, and planning to avoid clawback zones.

Additional Educational Resources: Tax Efficient Retirement Income Planning Course and the CPP Income Estimator. Free trials are available.

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