Government benefits represent the cornerstone of the Canadian Retirement Income System. If you are nearing retirement or in retirement it is important for you to understand how these government benefits play a role in your retirement income. In Canada there are two benefits that make up the retirement system.

Canada Pension Plan (CPP)

CPP is a contributory plan. If you have made at least one payment into the CPP plan, you qualify to collect a benefit.

In 2006, the average Canada Pension Plan retirement pension paid out was $473.09 per month. The maximum for you can get from CPP is currently $863.75 per month or 10,365 per year. The benefit you receive is based on how much, and for how long, you contributed to the Plan. The pension is designed to replace about 25% of the earnings on which you paid into the Plan.

You are eligible for normal CPP at age 65. However, you can collect the CPP as early as age 60 but at a reduced amount. You will lose 0.5% for every month you take CPP before your 65^th birthday. For example, at age 60, you will lose 30% (0.5% x 60months) of your eligible amount at age 65. You must also show that you have substantially or completely stopped working. This means that you earn less than the maximum CPP amount in the month your pension begins and the month before. For most people, collecting CPP early makes good sense!

Finally, it is important to note that CPP does not come to you automatically, you must apply for the CPP benefit.

You can get an estimate of your Canada Pension Plan retirement pension, by checking your Statement of Contributions, or call 1 800 277-9914. The closer you are to the date on which you want to begin your pension, the more accurate the estimate will be.

Old Age Security (OAS)

The Old Age Security program is one of the cornerstones of Canada's retirement income system. Benefits include the basic Old Age Security pension, the Guaranteed Income Supplement and the Spouse's Allowance. Unlike CPP, the Old Age Security program is financed from federal government's general tax revenues.

The Old Age Security pension is a monthly benefit available to anyone 65 years of age or over (unlike CPP, you cannot collect earlier). Eligibility for OAS is all based on residency and has nothing to do with employment history. It also does not matter if the applicant is working or retired. They simply have to be over the age of 65 and resident of Canada for 10 years after the age of 18.

Higher income pensioners also repay part or all of their benefit through the OAS clawback. This clawback currently starts at $63,511. If your income exceeds $63,511, you will be subject to a clawback of 15% of your OAS payments. Your benefit will be fully clawed back if your total income exceeds $102,865. While clawback is a popular concern of retirees, less that 2% actually get clawed back.

Currently, the maximum benefit for OAS is $491.93 per month.

In addition to the basic OAS pension, low-income seniors may qualify for other retirement benefits such as the Guaranteed Income Supplement and the Allowance. The threshold for low income depends on whether you are single, married or widowed.

My two cents

While many people believe the government will take care of them in retirement, we can see from the numbers that this is far from the truth. Government benefits will help retirees but it will not provide adequate levels of retirement income on their own. Be sure to incorporate government benefits into your retirement plan but also make sure you look at RRSPs, pension plans, or investments to ensure a safe and happy retirement.