The Canadian government recently announced that it would do everything to make sure that retirement plans such as the Old Age Security (OAS) plan and the Canada Pension Plan (CPP) would not disintegrate (a concern of many Canadians who have been banking on these plans). While this is good news for the most part, there is still a large amount of confusion surrounding the two types of retirement plans. Here is some basic information about both OAS and CPP plans that you may find helpful when planning your retirement strategy.

Canada Pension Plan Basics

• Unlike the OAS plan, the CPP plan is open to all Canadians who have contributed to the system through paycheck deductions. As such, the amount of money given through a CPP depends on two factors: the length of time a person was working and how much that person paid into the system throughout working years.
• Requesting to receive CPP funds prior to one’s 65^th birthday will result in a small penalty, though early withdrawal is possible. The penalty in this case is 0.52 percent (at the time of this writing) that will be applied to each month prior to a person’s 65^th birthday (for example, if you start 4 months early, the penalty will be a total of 2.08 percent and so on).
• Anyone who does not request to receive CPP funds on the start of a 65^th birthday will be given increased funds (0.64 percent monthly, at the time of this writing).
• Canadian citizens can apply for the CPP plan at any time, though most people wait to apply for this plan six months prior to the start of CPP payments.
• Contribution-wise, self-employed individuals must add 9.9 percent of business income to a Canadian Pension Plan. Those who are not self-employed will contribute 9.9 percent as well, though half of this amount is paid by an employer. Maximum yearly amounts fluctuate on a yearly basis.
• How much money can you hope to gain from a CPP retirement pension?  The average monthly CPP benefit in 2011 was $512.64. The maximum payment in 2012 is $987.67. On average (according to a Service Canada statement based on 2002 statistics), people who have earned an average wage of $39,100 annually can hope to receive $788 in CPP benefits per month. Annually, that number rounds out to $9,456. Is this a large enough amount for you to retire on?

 

Old Age Security Basics

• If you have been living in Canada for ten years following your 18^th birthday, you can apply for the OAS plan. Likewise, you can apply for this plan if you currently live outside of Canada but are a Canadian citizen or resident and have spent at least twenty years living in Canada (following the age of 18).
• Full plan: in order to gain full pension plan benefits, you must have lived in Canada for forty years following your 18^th birthday.
• Partial plan: if you did not live in Canada for forty years following your 18^th birthday, you may qualify for a partial pension plan. A partial plan is based on the number of years that you have resided in Canada following your 18^th birthday. A minimum payout equals ¼ of the total (adding up to ten years lived in Canada).
• It is only possible to apply for the OAS plan six months prior to your 65^th birthday.
• Anyone applying after the age of 65 will gain up to eleven months in missed monthly payments retroactively in addition to a payment for the month in which that person has applied.
• Following OAS approval, the amount of OAS pension given will not fluctuate (even if you spend more or less years in Canada).
• According to Service Canada, the average OAS pension payout monthly was $508.35. That monthly amount rounds out to an average of $6,100 per year.

 

Are Government Plans Sustainable?

Both the CPP plan and the OAS plan seem relatively stable. However, there is some doubt as to whether or not CPP and OAS plans will be sustainable looking towards the future. Given the present state of the unstable economy, many financial forecasters are uncertain as to the future of the CPP and OAS plans.

Some also caution that the number of taxpayers compared to the number of pensioners is not equal, and this could spell certain disaster for those who have not made additional retirement investments.

Based on the information listed above, retirement income from both CPP and OAS plans will, on average, total annually roughly $15,556. Will a yearly income of less than $16, 000 be enough for you to live off of? (especially considering the rising cost of living). And while both the CPP and OAS plans look good on paper, it is wise to seek out additional retirement investments just in case these government plans don’t pan out in the long run.