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Pensions on Solid Ground

What Canadians Received

The retirement income system known to Canadians in the 1990s was the product of initiatives covering the greater part of a century. From the hesitant introduction of the Old Age Pension in 1927 to the first universal pension of 1952, through creation of the Canada Pension Plan and the Quebec Pension Plan in the 1960s and the expansion and reforms of the 1970s and 1980s, the country had gradually erected a public pension structure that had significantly improved the quality of life for seniors. The essential nature of that structure remained intact in the 1990s, but was under pressure from an ageing population and federal government indebtedness. Initiatives in this period were directed toward the challenges of affordability and sustainability.

The Old Age Security program continued to form the first tier of Canada's retirement income system. The basic Old Age Security pension was available to all Canadians 65 and over who met the residency requirements and was indexed quarterly to offer protection from inflation. Partial pension benefits could be obtained by those who fell short of meeting residency criteria for full pensions. However, pensioners with a net income over $53,960 by the year 2000 were required to return some or all of their basic Old Age Security pension through the income tax system. By the year 2000, pensioners with a net income of $ 87,025 had all of their benefits withheld. This "clawback" affected about five per cent of beneficiaries.

Old Age Security pensions were augmented by a Guaranteed Income Supplement for Old Age Security pensioners on low incomes. (The proportion of Old Age Security pensioners receiving this supplement was 37 per cent, or about 1.4 million people per month by early 2000.) An Allowance was available for 60- to 64-year-old spouses of Guaranteed Income Supplement recipients. An Allowance was also provided for any survivor between the ages of 60 and 64 who qualified under the income and residency rules. By 1999, Old Age Security benefits were being paid to 3.7 million Canadians at a cost of about $24 billion dollars. Women accounted for 57.4 per cent of recipients.

The second tier of the retirement income structure was composed of the Canada Pension Plan and the Quebec Pension Plan. These contributory, earnings-related packages of benefits ensured a measure of protection for contributors and their families against the loss of income due to retirement, disability, or death. Until 1987, retirement pensions began at 65 and amounted to 25 per cent of the contributor's average pensionable earnings over their contributory period. However, flexible retirement provisions introduced in 1987 allowed for retirement any time after 60, with benefits adjusted accordingly.

Relationship between pre-retirement income and income from Public pensions.

By the 1990s the retirement income available through Canada's public pensions provided senior citizens with a significant proportion of their employment income before retirement. It is important to know how much of one's pre-retirement income will be replaced in retirement in order to plan for retirement effectively.
(G. Schellenberg, The Road to Retirement: Demographic and Economic Changes in the 90s (Centre for International Statistics, Ottawa, 1994), p.17).

From the late 1980s through the early 1990s the Canada Pension Plan disability program experienced a significant increase in applications. The caseload and expenditures also increased. A brief survey of the experiences of long-term sickness or disability income programs in other Organisation for Economic Co-operation and Development (OECD) member countries reveals that Canada was not alone in experiencing an increase in the number of disability beneficiaries in the late 1980s, a time of economic recession.

The number of people applying for Canada Pension Plan disability benefits increased dramatically in the decade following 1985. The number of applications rose 78 per cent in five years, from 61,303 in 1988-1989 to 109,001 in 1993-1994, when eligibility criteria changed. However, legislative changes were not the only factor leading to the dramatic increase in caseload and costs. Other major factors that contributed to caseload growth included improved information about the program and its benefits, increased efforts by provincial social assistance programs to refer clients to the Canada Pension Plan disability program in order to reduce their own costs, changing labour conditions and lay-offs of older workers, and referrals to the Canada Pension Plan disability program from insurance companies, which were similarly experiencing an increase in applications.

Children's and surviving spouse's benefits offered families valuable insurance against a loss of income after the disability or death of a contributor. Equal treatment of men and women was enshrined in the Canada Pension Plan, as was recognition of common-law relationships. Significant advances had been made for women over the previous decades. Credit-splitting was now mandatory for divorcing couples, and available upon application for separated spouses and common-law partners. Couples over 60 years of age who continued to live together had the option of splitting their Canada Pension Plan payments. There was also a "child-rearing drop-out" provision that allowed parents who stayed out of the workforce to raise their young children to exclude those low-earning periods in the calculation of their pension amount.

Excluded from the Canada Pension Plan at its inception because they did not pay income taxes and therefore did not have the normal means of submitting compulsory contributions, Aboriginal people who earned their income on reserves could now participate on a voluntary basis through payroll deductions.

Both Old Age Security and the Canada Pension Plan were included in international social security agreements that Canada had signed with other countries. This allowed a person who lived and worked in another country to be eligible for social security benefits, either from that country or from Canada. A person would qualify for these benefits by living and working in a country that had a reciprocal social security agreement with Canada, and by accruing credits in the social security plan of that country. By July 2000 there were 38 such agreements in force, with more to follow.

The most significant change in the 1990s involved the Canada Pension Plan. In 1998, concerns over the availability of funds for the coming retirement of the post-war baby boom generation led to reforms aimed at financial sustainability. Legislation implemented in that year stipulated that contribution rates would rise rapidly to 9.9 per cent (combined employer and employee portions) of pensionable earnings by the year 2003, and then remain at that level thereafter. With the introduction of this steady-state contribution rate, the Canada Pension Plan would retain sufficient reserves to pay five years' worth of benefits, up from the current two years' worth.

With a view to earning a higher rate of return, the investment of Canada Pension Plan contributions would become more diversified. Previous policy had dictated that Canada Pension Plan funds be invested only in what were essentially risk-free provincial and federal securities. Under the new policy, these funds could also be invested in the stock markets. A Canada Pension Plan Investment Board, accountable to the Canadian people and independent of government and of the Plan itself, was established to carry this out.

In calculating retirement benefits, maximum earnings for the last five, rather than the last three, years would form the basis of working out average lifetime pensionable earnings. With the idea of expanding the number of contributors to the Canada Pension Plan and increasing Plan revenues at a given contribution rate, the Year's Basic Exemption would be kept at $3,500. In 2000, the Year's Basic Exemption was $ 3,500.00. The Year's Maximum Pensionable Earnings was set at $ 37,600.00. The combined employer and employee contribution rate was 7.8 per cent ( or 3.9 per cent respectively) on earnings between these limits. There were an estimated 10.1 million contributors.

Lump sum death benefits were to be held at the reduced figure of $2,500 indefinitely, and eligibility for disability benefits became more stringent, while combined benefits recipients such as those who were receiving a retirement and a survivor pension simultaneously, were subject to new rules that could lead to lower overall benefits.

Initiatives were also undertaken to address rising costs in the Old Age Security program. In 1996, facing a difficult fiscal situation, the government proposed a change to the existing senior income package composed of the Old Age Security pension and the Guaranteed Income Supplement. In its place would be a single income-tested monthly payment program called the Seniors Benefit. However, as the fiscal situation improved, this new program was no longer necessary.

Finance Minister Paul Martin summed up the government's change in plans in a press release dated July 28, 1998:

"Therefore, in light of the structural enhancements to the public pension system, the turnaround in the country's economic prospects, and because of our commitment to sound fiscal management, the government is today announcing that the proposed Seniors Benefit will not proceed. The existing OAS/GIS system will be fully maintained."
(Department of Finance Canada news release, Finance Minister's Statement on the Seniors Benefit, Ottawa, July 28, 1998.)

While the Seniors Benefit never went into effect, other changes were implemented in the Old Age Security program to control costs. In 1996, a Non-Resident Tax was introduced for Old Age Security and Canada Pension Plan beneficiaries residing outside Canada. This imposed a 25 per cent withholding tax on pensions paid abroad, unless the recipients were living in a country that had signed a tax agreement with Canada. In that case, the withholding tax would be less, possibly as low as zero. Lower-income payees could apply for a further reduction if they provided a report of their income for the previous year.

A Non-Resident clawback of Old Age Security benefits was also introduced. Calculated on the same basis as the regular clawback, it would be applied on top of the Non-Resident Tax with similar tax treaty restrictions. For the first time, too, the clawback for higher-income beneficiaries would be deducted before the payment was sent out.

The final Canada Pension Plan and Old Age Security reform of this period was not a cost-cutting measure, but a modernization initiative. In the year 2000, equality of treatment in all federal legislation was introduced for same-sex couples. The word "spouse" would continue to apply to partners in a legal marriage, but members of same-sex couples would henceforth be covered under the definition of common-law partners. To reflect this change, the Old Age Security Spouse's Allowance was renamed the Allowance and the Widowed Spouse's Allowance became the Allowance for the survivor. Similarly, eligibility for Canada Pension Plan survivor benefits and for the credit-splitting provision were extended to same-sex couples.