Canada’s retirement income system consists of three main pillars: 1) a two-part non-contributory, tax-financed Old Age Security (OAS) program for those over age 65 including the low-income support Guaranteed Income Supplement (GIS) and allowances for widows/widowers and spouses too young to be eligible but with eligible partners; 2) a contributory, earnings related public pension system, the Canada and Quebec Pension Plans (CPP and QPP or C/QPP); and 3) the tax treatment of employer-sponsored registered pension plans and personal retirement savings vehicles. In addition, there are age-based tax credits and several provincial low-income supplement programs for those over age 65.
Age 65 is Canada’s NRA, which corresponds to the earliest eligibility-age for OAS and the GIS, and the receipt of full C/QPP retirement benefits. C/QPP retirement benefits can commence as early as age 60, but there is a downward actuarial adjustment; if commenced after age 65, an upward actuarial adjustment is applied, with no actuarial advantage to C/QPP commencement after age 70. Unlike most high-income countries, Canada is not increasing its NRA beyond age 65.
3.1 OAS and GIS
OAS is a residency-based individual pension for those aged 65. Benefits are taxable, inflation-adjusted (quarterly, since 1973), and financed through general tax revenues. The 2022 maximum monthly benefit, $642.25, is paid to those whose previous year’s personal net income (total taxable income less non-contributory public pension benefits, claimed income tax and credits and deductions, and social security contributions and repayments) is at most $79,845. For net income exceeding that threshold, OAS recipients face a federal recovery tax on benefits of 15%. OAS benefits are considered taxable income.
Table 1 presents a list of recent policy shifts to the OAS program that potentially affect post-age 65 employment decisions. Namely, since 2013, OAS benefits can be deferred until age 70 with an actuarial adjusted increase of 0.6% per month (7.2% per year). For higher earners who choose to work beyond age-65, the deferral option may have made the choice easier since they could now avoid the recovery tax and gain extra OAS benefits upon take-up. In addition, since 2013, OAS automatic enrollment is available for eligible seniors aged 65.
Within the OAS program is the family-income tested (based on, if married, own and spouse’s combined net income), the GIS benefit for low-income singles and couples. Eligibility for full GIS requires receipt of OAS benefits and, for single individuals in 2022, a net income of $19,464 or less and, for couples, a net income of $25,728 or less if each spouse receives OAS and $46,656 if only one receives OAS. GIS benefits are subject to a 50% tax-back on net income, excluding OAS, in excess of an earnings exemption. Maximum monthly GIS benefits in 2022 are $1,219.68, and this amount is adjusted quarterly for inflation. Unlike OAS benefits, GIS benefits are considered non-taxable. In 2008, the GIS earnings exemption was increased from $500 to $3,500 of (non-self-employment) employment income for the tax-back. This increase also applied to the widows/widowers/spousal allowances program, which is subject to a 75% tax-back rate.
Table 2 outlines a set of recent policy shifts that potentially affect post-age 65 employment decisions for those with low earnings. In 2011 the GIS top-up provision provided GIS-eligible seniors with next to no private retirement income (i.e., $2,000 for unmarried individuals and $4,000 for couples) an annual GIS top-up of $600 for single seniors and $840 for couples. In 2016 the top-up was increased to $947. The GIS top-up is clawed back at a 25 percent rate, meaning that GIS recipients who also receive the top up are subject to a 75% claw back on non-OAS income. In addition, and although not within the timeframe of this paper, beginning in 2020, the earnings exemption was raised to $5,000 for employment and self-employment income. Moreover, 50 percent of the next $10,000 of employment or self-employment income is also exempt.
3.2 C/QPP retirement benefits
The contributory, earnings-related CPP is a social insurance program for retirees, which covers all workers in all of Canada except the province of Quebec. Workers in Quebec are covered by the similar but distinct QPP. In this paper, while I only consider CPP and QPP ‘retirement benefits’, it is noteworthy that these programs also feature a disability insurance component (Gruber, 2000; Milligan and Schirle, 2016), a survivor’s component, a death benefit component, and the children’s benefit (Employment and Social Development Canada, 2022).
CPP and QPP retirement benefits are a function of workers’ contributory earnings history after age 18, or since the plan’s inception in 1966. Eligibility for actuarially adjusted benefits begins at age 60, the early retirement age (ERA), but the “standard” age of take-up, for unadjusted benefits is age 65. There is a benefit penalty applied to early take-up between ages 60 and 64 and benefit compensation rewarded to deferred take-up between ages 65 and 70. No actuarial advantage is received with take-up beyond age 70. CPP and QPP retirement benefits replace at most 25% of average career earnings up to the average industrial wage at the time of retirement, which is known as the Year’s Maximum Pensionable Earnings. This career averaging excludes a percentage (called the ‘drop-out provision’, now 17%) of the years since age 18 by dropping out the lower (including zero) contributory earnings years. Workers’ and employers’ contributions are deducted at source from employment income. Each side contributes 4.95% of employment income in excess of the Year’s Basic Exemption amount of $3,500, up to the Year’s Maximum Pensionable Earnings. The self-employed pay both the worker and employer portions.
In table 3 I present a before and after picture of the key CPP and QPP policy parameters that were changed under the 2012 reform. In addition, I also outline the key differences in these parameters and changes across the CPP and QPP plans. The elimination of the Work Cessation Test, which, before 2012, restricted eligibility of CPP retirement benefits. It required workers reduced their employment income to no more than the maximum monthly CPP benefit ($1,243.75 in 2022) for two consecutive months following take-up. Of particular interest in Table 1 is differences in the timing of the removal of the Work Cessation Test across the two plans. It was eliminated two years later, in 2014, under the QPP plan.
Several other changes to the rules also matter for this analysis and the interpretation of my results. A similar set of reforms to the U.S.’s OASDI program was analyzed by Duggan et al., (2021). For, for example, the CPP’s and QPP’s drop-out provision operates differently: while the CPP’s excludes a percentage of low or zero contributory-earnings years from the benefit calculation, the QPP’s only updates the benefit calculation if current year’s contributory earnings are higher than in any previous years. This difference in rules favours QPP participants’ work incentives relative to CPP participants. Second, the penalties and rewards on early and deferred retirement benefit claiming are higher under the CPP program that the QPP. Hence, at ages 60-64, CPP participants have a greater incentive to delay their pension compared to QPP participants. In addition, the Working Beneficiaries Provision was introduced in 2012. For working CPP and QPP claimants, earnings-based contributions are still made and go towards a ‘post-retirement benefit’. With no Work Cessation Test and the existence of the post-retirement benefit, the retirement and claiming decisions are effectively disentangled at ages 60-64.