News Article

Changes to the retirement income system in Canada

Posted: March 29, 2012

The federal government's Economic Action Plan 2012 will change Canada's retirement system in significant ways. Here is what's ahead:

The proposed changes:

  • The age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplements (GIS) will be gradually increased to 67 from 65, starting in April 2023, with full implementation by January 2029. An 11-year notification period, followed by a six-year phase-in period, is being provided to ensure that individuals have sufficient advance notification to plan their retirements and make adjustments.
  • This proposed legislative change to the age of OAS/GIS eligibility will not affect anyone who is 54 years of age or older as of March 31, 2012 (that is, those born on March 31, 1958, or earlier). Those who were born on or after Feb. 1, 1962, will be eligible for OAS at 67.
  • Those born between April 1, 1958, and Jan. 31, 1962, will have an age of eligibility between 65 and 67. Someone born in April 1960 ó one year and one month after the minimum eligibility age of March 31, 1958 ó will be eligible for OAS/GIS at age 66 and one month ó one year and one month later than the age 65 start date in place today.
  • In line with the increase in age of OAS/GIS eligibility, the ages at which the Allowance and the Allowance for the Survivor are provided will also gradually increase from 60 and 64 today to 62 and 66 starting in April 2023. This change will not affect anyone who is 49 years of age or older as of March 31, 2012.
  • The government will ensure that certain federal programs, including those provided by Veterans Affairs Canada and Aboriginal Affairs and Northern Development Canada that provide income-support benefits until age 65, are aligned with changes to the OAS program.
  • The government will discuss the impact of the OAS changes on Canada Pension Plan (CPP) disability and survivor benefits with provinces and territories, who are joint stewards of the CPP, in the course of the next triennial review.
  • To improve flexibility and choice in the OAS program, starting on July 1, 2013, the government will allow for the voluntary deferral of the OAS pension for up to five years, allowing Canadians the option of deferring take-up of their OAS pension to a later time and receiving a higher, actuarially adjusted, annual pension. GIS benefits, which provide additional support to the lowest-income seniors, will not be eligible for actuarial adjustment.
  • The government will improve services for seniors by putting in place a proactive enrolment regime that will eliminate the need for many seniors to apply for OAS and GIS. This measure will reduce the burden on seniors of completing application processes and will reduce the government's administrative costs. Proactive enrolment will be phased-in from 2013 to 2015.
  • On Nov. 17, 2011, the federal government introduced the Pooled Registered Pension Plans (PRPPs) Act. PRPPs will provide a new, accessible, large-scale and low-cost pension option to employers, employees and the self-employed. The PRPP Act will apply to employees in industries that are federally regulated. It will also apply to individuals employed in the Yukon, Northwest Territories and Nunavut. Provinces must introduce enabling legislation in their own jurisdictions to make PRPPs available throughout Canada.

Where do we go from here? If you wish to make up this difference through self-funding, the good news is that the tools to make this happen in an efficient manner are already available:

i) increase your RRSP contributions by $100 a month over the next 10 years;
ii) put your RRSP refund back into your RRSP;
iii) put your RRSP refund into a TaxFree Savings Account (TFSA)
iv) review your household expenditures and reduce your monthly expenses in retirement by a few hundred dollars. By deferring OAS to age 67, the only loss is the additional income you would have received under the old rules for a two-year period. In today's dollars, this is equivalent to $400 to $800 a month of spendable, after-tax income, or a total of about $14,400. Considering that most Canadians will require additional savings in their pension plans and RRSP accounts of many hundreds of thousands of dollars, this small amount of money for a two-year period of time is easily recoverable.

What's the best change to the retirement system in the budget? One of the most exciting changes occurring at this time is the launch of PRPP. One of the great hopes of this plan will be a lower-cost, stable pension structure for the vast majority of Canadians. Over their lifetime, many Canadians will pay hundreds of thousands of dollars in investment-management fees. While it is obvious that fees for investment products can never be zero, a reduction of 15% to 25% can add many thousands of dollars to income each and every year of retirement. Lowering fees to 1.5% of the value of the portfolio from 2.5% can provide as much as $10,000 of additional income each year of retirement. Over 20 years of retirement, this adds up $200,000. This will be far more beneficial to Canadians than a mere deferral of OAS benefits to an aging population.

Douglas Nelson, B.Comm. (hons.), CFP, CLU, MFA, CIM, is an independent financial advisor in Winnipeg and the author of Master Your Retirement: How to fulfill your dreams with peace of mind.