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How to estimate your government pensions

How much money you need for retirement is open for debate. One rule of thumb suggests 70 percent of your current income is necessary, but as little as 50 percent might also do.

As to where that retirement money will come from, there are three possibilities: your own savings, a private pension plan or a government pension plan. Private pension plans cover only 40 percent of Canadians, according to the Government of Canada, so most of us will rely on savings and public pensions.

In fact, about 98 percent of Canadians over the age of 65 draw some form of government pension, whether it's the Canada Pension Plan (CPP) and/or the Old Age Security (OAS).

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Understanding your entitlements under these two systems can be tricky, but it's worth the effort, since a typical Canadian can expect to get about $10,000 a year between the two systems, says Malcolm Hamilton, a pension consultant with Mercer Human Resource Consulting in Toronto.

Canada Pension Plan (CPP)
"CPP covers only those who are in the workforce" and is a joint provincial-federal program, explains Bruce Cohen, author of "The Pension Puzzle," an easy-to-follow primer on pension planning. Because it is a joint program, "it's pretty hard to make major changes," he says.

Working Canadians and their employers pay into the fund based on maximum earnings of $40,500. However, Tina Di Vito, vice president and national manager of retirement planning and taxation at BMO Nesbitt Burns, in Toronto, warns that "CPP is only designed to replace 25 percent of that income, which is not very much."

The amount you'll receive depends on your career earnings. CPP is indexed to inflation and the government sets the payment schedule every January. Working Canadians should receive a yearly pension statement from CPP, which provides an estimated monthly pension they will receive once they hit 65. The maximum annual payment for 2004 is $9,770 or about $814 a month, says Di Vito. That amounts to income replacement of about 24 percent for someone earning $40,000.

However, most people don't earn the maximum. In fact, the average monthly CPP payment in 2003 was $447 or $5,364 a year, all of which is subject to income tax. For more information about CPP payment rates, check out Social Development Canada's Web site.

You can start collecting CPP as early as age 60, but you will forfeit 30 percent of the benefit. You can also wait until as late as 70 and earn 30 percent more. You must apply to collect CPP, which can be done online or by mail, and the government suggests applying six months in advance.

In order to start collecting CPP, you must stop working for one month, but can start working again afterward and still receive your CPP payments. But if you're collecting benefits and then take a job, you can't pay into the plan in the hopes of increasing your current pension.

While there was once a concern that CPP was underfunded and would not survive the approaching crush of retirees, a recent actuary report suggests it's good for 75 years, says Cohen. He speculates that if there are any changes to the CPP plan, it will likely be upping the maximum benefit to entice people to wait until they're 65 or older to apply.

Old Age Security (OAS)
The more complicated of Canada's public pensions is OAS. Your entitlement to benefits is tied to your income and, unlike the CPP, which is a separate fund, OAS is funded out of ordinary government revenues, explains Di Vito. "There is always the risk that it will be altered in some way."

To qualify for OAS, you have to be over 65 and have lived in Canada for a minimum of 10 years after the age of 18. Like CPP, you will be taxed on the amount you receive. OAS is also indexed to inflation and the government sets the amount payable four times a year based on the cost of living. You must apply for OAS benefits and should do so six months before turning 65.

The current maximum payment is $467 a month or $5,600 a year. However, the average monthly payment as of March 2004 was only $442 or $5,300 per year.

While that's the amount you are technically entitled to, the government also looks at how much you earn from other pensions and investments. If you earn too much, your OAS benefit will be reduced. If you earn too little, your benefit will be topped up under the Guaranteed Income Supplement (GIS) or the Allowance Program, which are both technically part of the OAS system.

The OAS claw-back starts when your income reaches $59,790; OAS is eliminated if you earn more than $96,972 a year. Only about two percent of Canadians have the total clawed back, so most people can expect to earn something from OAS in its current form.

Low-income supplements
The GIS and Allowance Program are designed to provide low-income Canadians with additional funds. They are not taxed, but must be claimed on your tax return.

As well, you must apply for them each year. Like OAS, these supplements are geared to your income and are subject to claw-backs. The amount you receive depends on a variety of scenarios, such as whether you're single or have a spouse. It also varies if your spouse collects CPP or the Allowance. (For more information on OAS rates, visit Social Development Canada.

For GIS, a single person can receive a maximum payment of $554 a month or $6,655 annually, provided their income is less than $13,320. Combined with the maximum OAS payment, it would give you yearly income of $12,259. However, the average person receives GIS payments of $377 a month.

The Allowance is a top-up for Canadians between 60 and 64 and recognizes the hardships faced by couples that must survive on one spouse's pension. For more information about federal government pensions and benefits, contact Canada Benefits.

Since OAS is funded through general revenues, it's questionable how long such benefits can survive an aging population. "It's one of the fastest-growing federal government expenditures," says Cohen. "So while I fully expect to collect my due from CPP, I am not so certain about OAS."

Prime Minister Paul Martin already tried to tinker with OAS, back when he was finance minister, and felt the wrath of senior citizens. Nonetheless, because the feds alone call the shots, the government can easily modify OAS if the political will is there.

Pension consultant Hamilton says if you don't have a private pension to supplement government pensions, the best bet for Canadians is to accumulate between $200,000 and $300,000 for a single person or $400,000 for a couple. With that and government pension, "you'll do just fine."

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He's a frequent contributor to the National Post, Investment Executive and Wall Street & Technology.

-- Posted: Jan. 24, 2005
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