Canada's three-pillar retirement system
Canada's retirement income system is structured around three main pillars to provide financial security for seniors. The first pillar includes government benefits funded by general tax revenues, such as the Old Age Security (OAS) pension and the Guaranteed Income Supplement (GIS). The second pillar is the Canada Pension Plan (CPP), a mandatory contributory program for workers outside Quebec. The third pillar consists of voluntary private savings and workplace pension plans, like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). Understanding how these components work together is key to a comfortable retirement.
Canada Pension Plan (CPP)
The CPP is a taxable, earnings-related program providing a monthly retirement pension. Eligibility requires at least one valid contribution, with the amount depending on earnings, contribution length, and age at collection.
- Start Age: Collection can begin as early as 60, with the standard age being 65.
- Early vs. Delayed: Starting CPP early (60-64) reduces benefits permanently by 0.6% per month (up to 36% at 60). Delaying until 70 increases benefits permanently by 0.7% per month (up to 42%).
- Contributions: Mandatory for most workers aged 18-64 earning over a basic amount; optional for those working between 65 and 69.
Old Age Security (OAS)
OAS is a monthly, taxable pension for most Canadians 65 and older, based on age and residency, not employment history.
- Residency Requirements: Living in Canada requires age 65+ and at least 10 years of residency after age 18. A full pension requires 40 years, while a partial pension is possible with 10+ years.
- Delaying OAS: Delaying up to age 70 increases the monthly amount by 0.6% per month (up to 36%).
- Income Clawback: Higher-income seniors may have OAS reduced by a recovery tax.
How to maximize your retirement income
Strategic planning involves deciding when to collect CPP and OAS. Delaying can result in higher lifelong monthly income, beneficial for those with a longer life expectancy or other income sources.
CPP vs. OAS comparison table
| Feature | Canada Pension Plan (CPP) | Old Age Security (OAS) |
|---|---|---|
| Eligibility | Requires at least one valid contribution to the plan. | Based on age (65+) and length of residency in Canada. |
| Standard Age | 65 | 65 |
| Early Benefits | Start as early as age 60 with a permanent reduction. | Not available early. |
| Delayed Benefits | Start as late as age 70 for a permanent increase. | Can be delayed up to age 70 for a permanent increase. |
| Contributions | Mandatory contributions by employees and employers (or self-employed) from age 18-64. | Funded by general tax revenues; no direct contributions required from individuals. |
| Income-Tested? | No. | Yes, subject to a recovery tax (clawback) for higher-income seniors. |
Other important retirement income sources
Beyond CPP and OAS, Canadians often use other sources:
- Registered Retirement Savings Plan (RRSP): Tax-deductible contributions with tax-deferred growth; withdrawals are taxable. Conversion required by age 71.
- Tax-Free Savings Account (TFSA): Contributions made with after-tax dollars; investment income and withdrawals are tax-free.
- Workplace Pension Plans: Employer-sponsored plans, like Defined Benefit or Defined Contribution plans, supplement government benefits.
Planning your next steps
Retirement timing is personal and depends on various factors. Understanding how to use different income streams is essential. For detailed information on federal retirement income, consult the official government website.
Visit the Government of Canada's retirement income sources page for more information.
