Income Support for Nonworkers, National Approaches
Income Support for Nonworkers, National Approaches
INCOME SUPPORT FOR NONWORKERS, NATIONAL APPROACHES
Means-tested and social insurance programs have evolved to provide income support to people who cannot, or are not expected to, support themselves. Thanks to old-age income protection schemes, typically referred to as social security, growing numbers of men and women around the world face an economically secure old age free of work. Between 1940 and 1999, the number of countries with programs that provide cash benefits to older persons, the disabled, and survivors rose from 33 to 167 (U.S. Social Security Administration, 1999).
Social security programs take a variety of forms. They may be non-contributory and paid for out of general revenues, or they may require contributions from workers and employers. They may be defined benefit plans that use a formula to calculate benefits based on some combination of earnings and years of employment or defined contribution plans whose benefits depend on plan contributions. Some provide a flatrate benefit to all residents of a country, subject to certain conditions; others are based on work histories and years of earnings. Programs may be targeted to individuals or families with income and/or assets below a certain level; others pay benefits to anyone who has met the contribution requirements. Mandatory savings programs, such as provident funds, are found in a number of countries; and in a few countries, mandatory private pensions add another layer of income protection in old age.
In the more developed countries of the world, social security coverage is nearly universal. Coverage in the less developed countries is generally far more limited, often restricted to public sector employees or workers in urban areas. Though still young, these countries are aging rapidly, causing governments to examine how best to extend old-age protection to vast numbers of people who lack access to a public old-age support system.
Canadian and American models
The continued aging of the more developed countries is prompting many of them to reassess their social security systems in light of rising old-age dependency ratios and concern that the public sector might not be able to maintain current levels of support without substantially higher taxes. In many countries, efforts to reduce the rate of growth of social security expenditures have resulted or are likely to result in the reform of old-age social protection schemes. This has been the case in Canada and the United States, countries whose approaches to old-age support share a number of important features and differ in fundamental ways.E
Both Canada and the United States have public, mandatory, contributory, earnings-related pension programs covering almost all workers that provide a portion of the income workers will need in retirement. Disability benefits are available in both countries. Both countries also offer tax incentives to encourage employers to provide private pensions and residents to save for their own retirement. Canada, however, provides a universal benefit, known as a demogrant, that can be supplemented by payments to persons with inadequate income. The United States lacks this universal benefit, but it, too, offers extra protection to very low-income elderly through a separate, means-tested program of income support.
Income support for older nonworkers in Canada
Two national programs help protect older Canadians from destitution in old age: (1) the Old Age Security program, which includes the Old Age Security pension (OAS), the Guaranteed Income Supplement (GIS), and the Allowance and Allowance for the Survivor and (2) the Canada Pension Plan (CPP). Canadian law allows the provinces to opt out of the CPP if they offer a similar pension plan. The province of Quebec has chosen this route and established the Quebec Pension Plan (QPP), which is comparable, but not identical, to the CPP.
The Old Age Security pension is a universal monthly benefit available to persons aged sixty-five or older, regardless of employment history, who are either Canadian citizens or legal residents who have resided in Canada for at least ten years since turning age eighteen. The full Old Age Security pension is paid to persons who have lived in Canada for at least forty years since turning eighteen; partial benefits are paid for shorter residency. Benefits, which are financed from general revenues, are paid monthly and adjusted quarterly based on increases in the Consumer Price Index. Pensioners with individual net income above a certain level must repay all or part of the OAS.
The Guaranteed Income Supplement (GIS) is an income-tested monthly benefit paid to recipients of an Old Age Security pension who have little other income. The amount of the GIS depends on marital status as well as income; any money other than the Old Age Security pension is defined as income for the purpose of determining the GIS amount. The GIS is indexed quarterly to reflect increases in the Consumer Price Index. The government bears the whole cost of these benefits, which may be supplemented by income-tested benefits in the provinces.
The Allowance and Allowance for the Survivor may be paid to spouses, partners, including common-law and same sex partners, and survivors. These benefits are based on need and limited to persons between the ages of sixty and sixty-four who have lived in Canada for at least ten years since turning eighteen. These benefits are converted to an Old Age Security pension when a recipient turns sixty-five.
The Canada Pension Plan is an earnings-related pension program that pays full retirement benefits at the age of sixty-five. Early reduced benefits may be paid starting at age sixty; late increased benefits are available up to age seventy. Beneficiaries must have made at least one year of contributions to qualify for this pension. All workers, including the self-employed, between the ages of eighteen and seventy must contribute to the Canada Pension Plan or the Quebec Pension Plan. Benefits between the CPP and QPP are portable.
In 2001, Canadian workers and their employers in both the CPP and QPP each paid 4.3 percent of the worker's earnings up to a maximum, C$38,300, that is indexed to average wage growth. The first C$3,500 of earnings is exempt from taxation; this amount is not indexed. Self-employed workers contribute the employer's and the employee's share. The employer-employee contribution rate is rising to 4.95 percent of wages by 2003, where it is scheduled to remain.
Legislation enacted in 1998 introduced changes that move the Canada Pension Plan from pay-as-you-go financing, where contributions in any one year are largely paid out in benefits that year, to a system with greater funding. Designed to help pay future pension benefits in an aging Canada, the reserves are to be invested in a diversified portfolio of securities, rather than solely in provincial bonds, which was the practice until recently.
The formula used to calculate benefits at the time of retirement in Canada adjusts previous earnings to make them comparable to earnings at the time of retirement. The adjustment is based on the maximum pensionable earnings for the past five years. Up to 15 percent of low-income years may be deducted from the pension calculation, as may be years when someone was caring for a child under the age of seven. The resultant pensions, which amount to about 25 percent of a worker's average monthly earnings over his or her working life, are fully indexed annually.
Spousal benefits are not paid under the Canada Pension Plan. However, survivors' benefits are payable to legally married and common-law survivors. These benefits amount to 60 percent of the spouse's retirement pension, up to a maximum and are reduced for retirement below the age of sixty-five.
The Canada Pension Plan provides credit splitting upon divorce or separation. Based on the premise that marriage or a common-law relationship is an economic partnership, credit splitting acknowledges that both partners are entitled to share the pension credits earned by either partner during their marriage or cohabitation. Upon divorce or separation, pension credits earned during the relationship are combined and divided equally between the partners. Such splitting generally works to the advantage of the lower earner in a partnership, typically the wife, and produces a higher retirement benefit than she would otherwise have received.
Canadian workers may be eligible for disability benefits if they have worked and contributed to the Canada Pension Plan or Quebec Pension Plan for a specified period. To qualify for disability benefits, a worker must have "severe and prolonged incapacity for any gainful activity" (U.S. Social Security Administration, 1999). At age sixty-five, disability benefits are converted to a retirement pension. Access to health insurance is an important component of financial well-being in old age, and virtually all Canadians are eligible for publicly funded health care in Canada.
Income support for older nonworkers in the United States
The primary public retirement program in the United States is the Old-Age, Survivors, and Disability Insurance (OASDI) program. OASDI, referred to by almost everyone simply as Social Security, now covers almost all U.S. workers, regardless of age. The primary exceptions include workers enrolled in some state and local pension plans and federal government employees hired before 1984.
The U.S. Social Security system is a mandatory contributory program under which workers and their employers each pay 6.2 percent of a worker's earnings up to a maximum, which in 2001 was US$80,400. This "taxable maximum" is adjusted annually based on increases in average wages. Self-employed workers pay the combined employer-employee amount. U.S. workers and their employers each contribute an additional 1.45 percent on all earnings to the Medicare program, the federal health insurance program for persons aged sixty-five and older.
For the first six decades of the OASDI program, full retirement benefits were payable at age sixty-five. Early actuarially reduced benefits have been available at age sixty-two since 1956 for women and 1961 for men. For workers turning age sixty-two in 2000, the age of eligibility for full benefits began to increase gradually; it will reach sixty-seven in 2027. Benefits will still be available at age sixty-two when the higher full benefit age is fully in effect; however, workers will experience a greater reduction in benefits. Workers who postpone collecting retired worker benefits between full retirement age and age sixty-nine receive a delayed retirement credit. This credit has not represented a full actuarial increase in benefits and has not been instrumental in prolonging the worklife. However, the credit is increasing and will reach the full actuarial increase of 8 percent per year for workers delaying retirement after 2008.
Social Security benefits are indexed according to changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers and adjusted once a year. To be eligible for benefits, workers must have at least forty quarters of credits, or ten years of earnings. Benefits are based on thirty-five years of highest indexed covered earnings out of a total of forty. The five years of lowest earnings are deducted before the benefit is calculated. There are no child-care credits or exclusions. Years of zero earnings, up to a maximum of five, serve as de facto child care credits for many workers who leave the labor force to care for children. Long-term low-income workers may be eligible for a minimum benefit.
Upon reaching retirement age, workers may be eligible for Social Security benefits based on their own earnings as workers, on the earnings of a spouse, or on a combination of the two. Most men and a growing number of women collect retired worker benefits based on their own work histories and earnings. Many spouses— predominantly women—still lack the requisite forty credits of coverage and are entitled to a spousal benefit that amounts to 50 percent of their husband's retired worker benefit. Workers whose retired worker benefit amounts to less than 50 percent of their spousal benefit are dually entitled, that is, they are entitled to benefits as retired workers and as spouses. However, they can only receive one benefit. Technically, they receive their own retired worker benefit that is "topped up" to the spousal benefit to which they are entitled. In effect, they receive the same benefit they would have received had they never contributed to Social Security. Though Social Security is gender neutral, most recipients of spousal benefits and dually entitled beneficiaries are women.
A divorced spouse who has been married for at least 10 years is also eligible for spousal benefit of 50 percent of the other spouse's retired worker benefit. A surviving spouse—whether a widow or divorc¤e who had been married 10 or more years—will collect 100 percent of the former spouse's benefit if that is higher than her own benefit. Common law partners may also be eligible for spousal and survivor benefits in states that recognize those marriages. Earnings sharing, as it is called in the United States, has been proposed for Social Security. Although extensively studied in the 1980s (U.S. House of Representatives; Congress of the United States; Fierst and Campbell), it has not advanced legislatively.
The weighted benefit formula used to calculate Social Security benefits redistributes income from higher earners to lower earners by replacing a greater percentage of the pre-retirement earnings of a low earner than a high earners Social Security replaces about 40 percent of the preretirement earnings of a life-time average earner.
Social Security disability benefits may be paid to workers with sufficient quarters of coverage who are unable to engage in "substantial gainful activity due to impairment expected to last at least one year or result in death." At age sixty-five, disability benefits convert to retired worker benefits. Medicare is the national health insurance program for persons sixty-five and older who are eligible for Social Security. Part A, which is non-contributory, covers hospital expenses. Part B, which requires a premium contribution from beneficiaries, primarily covers physician expenses.
Supplemental Security Income (SSI) is a means-tested program administered by the Social Security Administration that provides income support to needy persons aged sixty-five or older and blind or disabled adults and children. The level of benefits, however, keeps many of these recipients below the poverty level. Twenty percent of the recipients, or about 1.3 million persons, are receiving benefits based solely on age; another 11 percent are blind or disabled and sixty-five or older. The majority also receive Social Security (U.S. Social Security Administration, 2000a). Federal SSI payments, which are paid from general revenues, may be supplemented by payments from the States.
In recent years, the Social Security Trust Funds have been building up sizable reserves, which under current law are invested in special U.S. Treasury bonds guaranteed by the government. The growing demands that baby boomers will place on the U.S. Social Security system as they retire have led to numerous proposals for reform, including calls to invest a portion of the reserves in equities, as has occurred in Canada.
Canada refers to the three floors of its retirement income system. The first floor is the Old Age Security program, the second the Canada Pension Plan, and the third is private savings, which includes individual savings and employer-sponsored pension plan (Human Resources Development Canada, 2000a). In the U.S. retirement income system, reference is made to the three legs of the retirement income stool—Social Security, employer-provided pensions, and individual savings. The most significant difference between these two systems is that Canada offers a universal pension, and the United States does not. The key similarity between the two systems is the mandatory, earnings-related component that covers workers in the two countries and that requires contributions from both workers and their employees. Both systems provide relatively modest replacement rates that are adjusted to keep pace with inflation. There is a greater use of general revenues to support older persons in Canada than in the United States. Benefits are also available at a younger age in Canada and after shorter tenure.
Neither the Canadian publicly financed retirement income system nor the one in the United States provides all of the income middle-income retirees are likely to need in old age. Both countries attempt to have these benefits supplemented by employer-provided pensions and individuals savings. Both countries provide benefits to the needy elderly, although the programs that do this are very different from one another.
Despite differences in the public retirement income systems of Canada and the United States, both contribute roughly the same amount to total retirement income, though less of the total comes from the earnings related pension in Canada than in the United States (Gunderson, Hyatt, and Pesando). About 40 percent of the aggregate income of persons sixty-five and older in Canada in 1997 came from the OAS (29 percent) or the CPP/QPP (21 percent), while about 46 percent of the aggregate income of the sixty-five-plus population in the United States in 1998 came from publicly funded pensions, mainly Social Security (Human Resources Development Canada, 2000b; U.S. Social Security Administration, 2000b). Canada's Guaranteed Income Supplement goes to a much higher proportion of older persons than does the American SSI, although GIS is not, according to Turner, a poverty program like the U.S.'s Supplemental Security Income program.
Another significant difference between the Canada Pension Plan and the U.S. Social Security Program is the diversified investment of reserves currently permitted in the CPP but not in the U.S. Social Security program. Credit splitting and payment of certain benefits to same-sex common law partners also distinguish the publicly financed income retirement system in Canada from that in the United States.
Improvements in both systems over the years have resulted in sharp declines in the proportion of poor or low-income elderly. Though economic security continues to elude many retirees, the availability of indexed benefits guaranteed for life have gone a long way toward enhancing the economic security of older nonworkers in the United States and Canada. As a result, retirement in comfort and dignity is a reality for growing numbers of retirees in both countries.
Detailed information on income support for older nonworkers in Canada can be found at the web site of Human Resources Development Canada: www.hrdc-drhc.gc.ca. Comparable information for older nonworkers in the United States can be found at the web site of the Social Security Administration: www.ssa.gov.
Sara E. Rix
See also Canada; Canada, Retirement Income; Pensions, Plan Types and Policy Approaches; Pensions, Public Pensions; Social Security Administration; Social Security, and the U.S. Federal Budget; Social Security, LONG-Term Financing and Reform; Supplemental Security Income.
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