Module 1 - Optimizing Social Programs in Planning for Retirement and Health Security

Question 1

Explain the concept of social security in the context of government-sponsored benefits, and identify the basic principles on which government-sponsored programs are structured.

Answer 1

“Social security” is a term commonly identified with programs and measures that provide or enhance economic security for individuals. There are a number of basic principles inherent in the design of government-sponsored social security programs. These include:

(a) Government has a key role/responsibility in the provision of social security.

(b) It is socially desirable to redistribute income through intergenerational transfers.

(c) Programs can operate under a “social” insurance premise.

(d) The concept of universality is basic to most social security programs.

(e) It is socially acceptable to use the tax system as a vehicle for funding social security.

Question 2

Explain the key differences between social insurance and normal insurance. Provide examples of social insurance.

Answer 2

Key differences between social and normal insurance are:

(a) Social insurance is set up to administer a certain type of government-sponsored benefit that is ultimately governed by socioeconomic rather than cost/benefit principles.

(b) Social insurance does not usually have an actuarial base that ensures contributions equal benefits paid out.

(c) Under social insurance programs, the amount of benefits paid and the period of benefits entitlement are matters of public policy.

Employment Insurance (EI) and Workers’ Compensation (WC) are examples of social insurance.

Question 3

Explain the principle of universality.

Answer 3

“Universality” is a commitment to provide a benefit and/or type of service to a universal (or all of a targeted) population. In practice, universality means that the government, as the provider of the benefits, makes public policy decisions that determine the nature and type of service that is a required standard for the widest possible segment of society and provides access to benefits regardless of an individual’s financial circumstances.

Question 4

Explain the purpose of an income and/or means test in the context of government-sponsored benefits.

Answer 4

Income and/or means tests are used to determine basic eligibility and the amount of benefits entitlement under some government-sponsored benefits programs. An “income test” establishes the ability of a claimant to provide for his or her financial security by measuring specified income against a predetermined income standard. A “means or wealth test” establishes the ability of a claimant to provide for his or her own financial security by measuring specified wealth levels or possession of enumerated assets against a predetermined wealth standard.

Question 5

Explain what base- or foundation-level support means in respect of government-sponsored benefits.

Answer 5

“Base- or foundation-level support” means that the government benefit is intended to provide a minimum acceptable level of coverage that individuals are encouraged to augment.

Question 6

Identify the primary sources of funding for government-sponsored benefits.

Answer 6

Two sources of funding for government-sponsored benefits are own source revenue (raised by a government from its own imposition of a tax, license, fee or any other charge) and transfers from other government subsectors (money received directly from another party without being directly imposed by the receiving party).

The largest proportion of social security program funding is from taxation, but some funding comes from contributions to specific social insurance programs.

Question 7

Identify the implications of the Canadian Constitution for the provision of social security.

Answer 7

The Constitution is the supreme law in Canada. It sets out the division of powers between the federal parliament and the provincial legislatures. It also enshrines certain rights and freedoms for Canadians. For example, it sets out the principle of equality of rights—every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age, or mental or physical disability.

Under the Constitution of Canada, the federal and provincial governments share the responsibility for social security. Both play important roles in designing, funding and administration of income security and health care programs. The interpretation of constitutional law has an indirect but substantial influence on all aspects of government-sponsored programs.

Question 8

Identify the mechanisms under which government-sponsored income security and health care programs are regulated.

Answer 8

Laws

Legislation

An act or statute

Regulations

Guidelines and policies

Question 9

Describe the three basic methods of delivering benefits within Canada’s social security system.

Answer 9

The three basic methods of delivering social security benefits are to:

(1) Provide direct cash payments

(2) Provide goods and services directly

(3) Provide support through the income tax system.

Many government-sponsored programs use two or all three of the methods to accomplish different objectives within the parameters of total program delivery.

Question 10

Explain how tax credits, tax deductions, and tax exemptions are used to deliver social security benefits, and provide examples of how each supports social security programs.

Answer 10

The three basic ways to deliver benefits and examples are:

(1) Tax credits are dollar-for-dollar reductions in the tax payment required by an individual; they reduce the amount of tax owed. (Either refundable or nonrefundable)

(2) Tax deductions reduce the amount of income that is taxable. (For example, all employer premiums for CPP/QPP, EI and WC are a tax-deductible expense for the employer.)

(3) Tax exemptions are amounts not subject to income tax. (They reduce the amount of income that is taxable. Ex. EC disability benefits)

Question 11

Explain how benefits under the OAS Act are funded and administered.

Answer 11

OAS benefits are funded on a pay-as-you-go basis from the federal government’s consolidated revenue fund. This means the current generation of taxpayers pays for the benefits provided to the current generation of recipients. The benefit payments are considered general operating expenses financed by general federal tax revenue. The OAS Act is administered by the Minister of Employment and Social Development.

Question 12

Indicate the age and residence criteria for qualifying for an OAS pension.

Answer 12

An OAS pension is available to an individual aged 65 or over who meets these residency requirements:

(a) The individual is a Canadian citizen or a legal resident of Canada with a minimum of ten years’ residence in Canada after reaching the age of 18, or

(b) If no longer a resident in Canada, the individual must have resided in Canada for at least 20 years after reaching the age of 18.

Question 13

Outline instances when absence from Canada is not deemed to have interrupted an individual’s residence for OAS pension purposes.

Answer 13

The following are instances when absence from Canada is not deemed to have interrupted an individual’s residence for OAS pension purposes:

(a) The absence was of a temporary nature and did not exceed one year.

(b) The absence is for the purpose of attending school or university.

(c) The absence is required due to employment by:

• The United Nations
• The Commonwealth Secretariat
• The Organisation for Economic Co-operation and Development (OECD)
• The government of Canada
• A provincial government
• A municipal corporation
• North Atlantic Treaty Organization (NATO)
• The Canadian Armed Forces
• A Canadian firm or corporation if the individual maintains a permanent residence in Canada and returns within six months after the end of his or her employment outside of Canada
• A development or assistance program sponsored or operated by the government of Canada, a provincial agency or a Canadian nonprofit agency
• Seasonal work in lumbering, harvesting, fishing, etc.
• Seasonal work in transportation that travels between Canada and points outside Canada (i.e., aircraft, ships)
• An international charitable organization
• A missionary with any religious group or organization.

Question 14

Explain the requirements an individual must meet to qualify for a full OAS pension.

Answer 14

An individual qualifies for a full OAS pension by attaining an age of at least 65 and having resided in Canada for at least 40 years after reaching the age of 18. Failing this, a full pension is also paid to an individual who meets the following requirements.

(a) Has attained the age of 65, AND

(b) Lived in Canada for at least ten years immediately before applying for OAS, OR:

• Lived in Canada for at least one year before applying for OAS, AND
• Has a period of residency in Canada, after reaching the age of 18 but excluding the ten years immediately preceding his or her date of application, which equals at least three times the number of years the person did not live in Canada in the ten years immediately before applying for OAS.

Question 15

Explain how individuals who do not qualify for a full OAS pension can qualify for a partial pension and how that partial pension is determined.

Answer 15

Individuals aged 65 and over who do not qualify for a full OAS pension qualify for a partial pension by having lived in Canada for a period of at least ten years after their 18th birthday. The partial pension is X/40ths of a full pension, where X is the number of complete years of residence in Canada.

Question 16

Indicate the start date of OAS pension.

Answer 16

OAS pension commences the later of the month after an individual’s 65th birthday, the month after he or she has met the residence and legal status requirements or the month the individual asks to have the payments start. If an individual applies after the age of 65 and wants OAS to start at the age of 65, the pension may be paid retroactively to the month after his or her 65th birthday or the month following the month he or she meets the residence requirements, whichever comes later. Retroactive payments are only made for a maximum of 12 months, including the month in which the application is received. Individuals may defer the commencement of an OAS pension until after the age of 65 and receive a larger pension.

Question 17

Describe how OAS pensions and GIS benefits are indexed.

Answer 17

OAS pensions are adjusted quarterly as required (in January, April, July and October), if there are increases in the cost of living as measured by the Consumer Price Index (CPI).

Question 18

Describe the implications of being absent from Canada on the receipt of OAS pension.

Answer 18

If absent from Canada, individuals are entitled to receive their OAS pension indefinitely provided they had resided in Canada for at least 20 years after reaching the age of 18. If at the time of their departure, they resided in Canada for less than 20 years, they may receive their pension for the month of their departure and an additional six months only. Years of residence in, and/or social security contributions to, a country with which Canada has a social security agreement may decrease the 20-year requirement for receipt of pension in a foreign country. OAS pension is paid in Canadian dollars, whether benefits are received in Canada or abroad.

Question 19

Outline the primary objectives of international social security agreements.

Answer 19

International social security agreements coordinate the operation of OAS and CPP with the comparable social security programs of another country in order to accomplish three basic objectives:

(1) To ease or eliminate restrictions based on nationality, which may otherwise prevent Canadians from receiving benefits under the legislation of the other country

(2) To eliminate situations in which an employee may have to contribute to the social security programs of both countries for the same work

(3) To assist immigrants in qualifying for benefits based on the periods they have lived or worked in each country.

Question 20

Identify the two conditions that must be met in order for a country to conclude an international social security agreement with Canada.

Answer 20

In order for a country to conclude an international social security agreement with Canada, the following two conditions must be met:

(1) The other country must have a public pension system that can be coordinated with Canada’s OAS and CPP system.

(2) The other country must be prepared to grant reciprocity on such matters as the payment of benefits to persons living in Canada.

Question 21

Outline the criteria that must be met to qualify for GIS benefits.

Answer 21

To qualify for GIS benefits, individuals must be receiving the OAS pension, they must be resident in Canada, and their income must be at or below a qualifying level. If individuals are married, the combined income of the couple must be below a qualifying level.

Question 22

Explain how the GIS benefit amount is determined.

Answer 22

In most cases, the amount of GIS benefit is determined by income in the previous year, marital status and the amount of OAS pension an individual is entitled to receive. If an individual has just retired or anticipates a substantial drop in pension income, his or her GIS entitlement may be determined on the basis of an estimate of income for the current year. If the individual is married, this provision also applies to his or her spouse. The GIS amount is calculated in the same way, whether it is based on the individual’s actual income from the preceding year or on an estimate of income for the current year.

Question 23

Describe the basic formula for coordinating GIS benefits with other sources of income.

Answer 23

In the case of a single, widowed, divorced or separated OAS pensioner, the maximum monthly benefit is reduced by $1 for every $2 of other monthly income. In the case of a married couple who are both receiving an OAS pension, the maximum monthly benefit of each pensioner is reduced by $1 for every $4 of their other combined monthly income.

A special provision applies in the case of a married couple when only one spouse is an OAS pensioner and the other is not eligible for either OAS pension or the Allowance. In this instance, the pensioner is entitled to receive GIS benefits at the higher rate paid to single persons. The maximum monthly benefit is reduced by $1 for every $4 of the couple’s combined monthly income (excluding the pensioner’s OAS pension), and the first reduction of $1 is made only when the combined yearly income of the couple reaches 12 times the monthly OAS pension plus $48.

Question 24

Define “income” for GIS purposes.

Answer 24

For GIS purposes, “income” is defined to be the same as income for purposes of federal income tax but excludes OAS pension, provincial social assistance payments, Veteran Disability Pensions, War Veteran Allowances and CPP/QPP death benefits. Income includes any money that an OAS pensioner receives in the form of an employment-related retirement pension, income from CPP/QPP, interest, dividends, rents, wages, WC payments, etc. If a pensioner is married, the combined income of the pensioner and their spouse is taken into account. Since 2020, “income” also excludes an amount that will equal $5,000 for many individuals but will be lower for those with low income. The impact of this change allows individuals to retain more employment or self-employment income.

Question 25

Indicate when GIS benefits commence.

Answer 25

GIS benefits commence the month an individual is eligible for OAS, provided the eligibility requirements with respect to income are satisfied. The GIS benefit is added to the OAS pension each month.

Question 26

Describe the eligibility requirements for the Allowance and Allowance for the Survivor.

Answer 26

The “Allowance” is an income-tested monthly benefit payable to a 60- to 64-year-old spouse or common-law partner of an OAS pensioner who is entitled to GIS. “Allowance for the Survivor” is an income-tested monthly benefit payable to a 60- to 64-year-old surviving spouse or common-law partner of a deceased OAS pensioner entitled to GIS. Certain requirements related to residence and legal status in Canada must be met in order to qualify.

Residence requirements can be met if an individual resided in Canada for ten years after the age of 18. If not, a recipient may still qualify for a benefit if he or she has resided in, and/or made social security contributions to, a country with which Canada has a social security agreement.

Question 27

Outline the basic formula for coordinating Allowance and Allowance for the Survivor benefits with other sources of income.

Answer 27

The maximum Allowance is the sum of the OAS pension plus GIS at the married rate. The monthly Allowance is reduced by $3 for every $4 of the couple’s monthly income until the OAS portion is reduced to zero. After that, the GIS portion begins to be reduced at the rate of $1 for every $4 of the couple’s additional income. For Allowance, the GIS benefit paid to the OAS pensioner’s spouse is also reduced by $1 for every $4 of the couple’s additional income (a combined reduction of 50% of the couple’s additional income). For Allowance for the Survivor, the rate of reduction is $1 for every $2 of monthly income above the earnings threshold.

Question 28

Indicate when Allowance benefits cease.

Answer 28

Allowance benefits cease with the payment for June if income in the previous year (or combined income if married) exceeds the qualifying limit for the July payment. They also cease when a recipient dies or is absent from Canada for more than six months. The Allowance continues to be paid for three months after the month of separation. Allowance benefits cease after the month in which the individual again becomes a spouse either through marriage or a common-law relationship. Benefits cease if an individual is incarcerated in a federal penitentiary for two years or longer or in a provincial/territorial facility for 90 days or longer (if an information-sharing agreement is in place). The Allowance will restart after the individual has been released and they have advised Service Canada. When recipients reach the age of 65, Allowance benefits cease. At that time, recipients may be entitled to receive an OAS pension and possibly a GIS benefit.

Question 29

Describe the tax treatment of OAS pensions and GIS benefits.

Answer 29

For federal income tax purposes, OAS pensions are taxable income. GIS benefits are not taxable income.

Question 30

Explain the clawback provisions of the OAS pension recovery tax.

Answer 30

The OAS pension recovery tax acts to recover some, or all, of the OAS pension paid to higher income OAS recipients, and it is commonly referred to as a “clawback” of the OAS pension. The OAS pension recovery tax applies at a rate of 15% of the individual’s net earnings above an earnings threshold. If the clawback amount equals the OAS payment, no payment is made to the pensioner. The minimum and maximum earnings thresholds used to calculate OAS clawback change annually.

Question 31

Describe the tax treatment of Allowance and Allowance for the Survivor benefits.

Answer 31

For federal income tax purposes, Allowance and Allowance for the Survivor benefits are not taxable income but must be reported on the recipient’s income tax filing.