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Social Security Around the World III: Canada

Written By: Jason Shafrin - Jul• 04•06

In Chapter 2 of Social Security Program and Retirement around the World, economists Michael Baker, Jonathan Gruber and Kevin Milligan look at Canada’s Income Security Programs (IS).  According to their research, total expenditures on the three largest elderly transfer programs in Canada cost $22.7 billion in 1998-1999 or 20% of the federal budget.  Also, like most OECD countries, Canada has an aging population.  In 1975, contribution per capita towards public pensions exceeded these pension benefits per capita by $200.  By 1998, benefits exceeded contributions on a per capita basis by about $200.  The authors also note a trend for workers to retire earlier despite increased life expectancy.  In 1960, 87% of men aged 55-64 were labor force participants, but by 1999 this figure had dropped to 61%. 

Below I will discuss the major Canadian programs which transfer money to the elderly:

Old Age Security (OAS) System

Begun in 1952, this is the oldest federal social security program in Canada.  The program replaced means-tested, provincially-administered social security programs which were established in 1927.  The OAS program originally transferred cash to the elderly over 70 years of age but this age limit was later reduced to 65.  A uniform grant of about $420 (in 2000) is given to all who meet certain minimal residency and work requirements.  Since 1972, the OAS benefit has ben indexed to inflation (CPI).  This income is taxable and there is a clawback of 15% for high income individuals.

Canada Pension Plan/Quebec Pension Plan (CPP/QPP)

This is the largest of Canada’s IS programs.  It is financed through a payroll tax of 3.5% on all income between $3500 and the Year’s Maximum Possible Earnings (YMPE) which was $42,100 as of July 2006.  CPP/QPP averages an individual’s earnings between ages 18 and 65 after excluding 1) time spent on disability, 2) time caring for small children, 3) the remaining 15% of eligible months with the lowest earnings.  These amounts are then adjusted for inflation by multiplying eligible earnings by [(YMPE: year earnings accrued)/(average last 5 years YMPE)].  Once an inflation adjusted monthly income is calculated, individuals receive 25% of their previous income subject to a maximum. 

After 1987 for the CPP (and 1984 for QPP) individuals could claim their benefits at age 60 with an actuarially fair reduction in monthly payments.  Fifty percent of Canada’s citizens do claim their benefit early.  Benefits are paid at an individual level, but widows and surviving children under age 18 are entitled to the benefits of the deceased family member.

Guaranteed Income Supplement (GIS) 

This program is intended for OAS recipients with low incomes.  Individuals who wish to qualify for GIS must re-apply every year in order to receive the program’s income guarantee of about $500 per month for married families and $325 per month for single households.

Spouse Allowance (SPA)

For spouses aged 60-64 who are married to OAS recipients or widows of the same age, the SPA program gives them a cash transfer.  The benefits, however, are taxed away at 75% if the individual begins to work. 


Baker, Gruber and Milligan use the Statistics Canada Longitudinal Worker File data set to analyze retirement patterns in Canada.  Their major findings are that the IS system as a whole increasingly provides disincentives to work after age 61.   More specifically, while the present discounted value (PDV) of IS benefits decreases if one continues to work age 61; at age 69, working an extra year would reduce the PDV of IS benefits by 43%!  Reforming the IS system would be one way to induce more elderly individuals to continue to work. 

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  1. Colman says:

    Dumb question: why is early retirement bad? Why do the disincentives matter?

  2. Early retirement is not bad. People should choose to retire whenever they please. As nations get richer, it is likely that people will spend a greater percentage of their lives in retirement, since leisure is generally considered a normal good.

    For people who wish to work in old age, the government should not dissuade them from working. Telling people that they will lose a large portion of their government pension if they work is counter-productive. First, it leads people who otherwise would have worked, to retire and thus decrease the overall wealth of the nation. Secondly, it increases the tax burden the rest of society has to bear in order to pay for these individuals retirement, which means the rest of society is poorer.

    I do not wish to completely eliminate all public pensions; I want to give all individuals the opportunity to retire at any time they please. I simply do not believe the government should provide such large disincentives to work for elderly individuals.

  3. Colman says:

    Just wanted to check the reasoning: thanks.