The welfare state in Canada consists of three huge programs (health care, social security/old age security, and child care benefits) and a number of smaller programs. Table 18-3 shows one useful way to categorize the major welfare state programs in Canada.

The spending on these welfare state programs varies and comes from different levels of governments. For example, in the 2012–2013 fiscal year, governments in Canada spent $40.255 billion on Old Age Security benefits, $12.975 billion on family allowance/children’s benefits, and $17.099 billion on Employment Insurance benefits. In 2012, pension benefits payments from the CPP/QPP reached $46.22 billion, bringing total government spending on social benefits to more than $140 billion. Last but not least, the largest component in Canada’s welfare state program is the provision of health care services; doctors, hospitals,prescription medicine, and other specialized services, which cost $221.2 billion in 2013 for all levels of government.⁴

Table 18-3 distinguishes between programs that are means-tested and those that are not. In means-tested programs, benefits are available only to families or individuals whose income and/or wealth falls below some minimum. Basically, means-tested programs are social welfare programs designed to help only those with low incomes. By contrast, non-means-tested programs provide their benefits to everyone, although, as we’ll see, they tend in practice to reduce income inequality.

Table 18-3 also distinguishes between programs that provide monetary transfers that beneficiaries can spend as they choose and those that provide in-kind benefits, which are given in the form of goods or services rather than money. The largest in-kind benefits are dominated by federal, provincial, and territorial spending on health care. We’ll discuss health care in the next section of this chapter. For now, let’s examine the other major programs.

When people speak of welfare, they are often referring to monetary aid to poor families. The main source of such monetary aid in Canada is social services. Social services programs include social assistance, workers’ compensation benefits, veterans’ benefits, and other social services. These programs are exclusively for low-income families. Some means-tested programs, such as Guaranteed Income Supplement (GIS), National Child Benefit Supplement, Canada Child Tax Benefit, and affordable housing, are designated for specific groups of the population.

Old Age Security (OAS) is a major part of Canada’s public pension system. The OAS has two parts: the OAS pension, which is a monthly payment to Canadians who are 65 or above; and the OAS benefits (Guarantee Income Supplement, Allowance, and Allowance for the Survivor, which are additional payments to low-income seniors). At the time of writing, the monthly OAS pension payment was $551.54. Although the OAS pension was originally designed to be paid to all seniors, it now has a clawback feature. This essentially makes it a means-tested program. The clawback raises the marginal effective tax rate by 15 percentage points so that the maximum income to receive the OAS pension in 2014 was $115 716.

Economists use the term negative income tax for a program that supplements the earnings of low-income working families. While several countries do have a negative income tax program, Canada does not, though support for the idea is growing across the political spectrum. In the United States the program is known as the Earned Income Tax Credit (EITC). EITC provides additional income to millions of American workers. Under the EITC program, only workers who earn income are eligible for it; over a certain range of incomes, the more a worker earns, the higher the amount of EITC received. That is, the EITC acts as a negative income tax for low-wage workers. In 2010, married couples with two children earning less than $12 550 per year received EITC payments equal to 40% of their earnings. (Payments were slightly lower for single-parent families or workers without children.) The EITC is phased out at higher incomes, disappearing at an income of $45 373 for married couples with two children in 2010.

Non-means-tested programs are available to individuals and families regardless of income. The largest non-means-tested program in Canada is the provision of health care, which will be discussed in detail in the latter part of this chapter. CPP/QPP, a major component of the country’s public retirement income system, is also a significant non-means-tested program.

The CPP was established in 1965 by the Pearson government with the goal of providing financial security in the case of retirement, disability, or death. Quebec is the only province to have opted out of the CPP and instead has its own public pension (QPP). CPP/QPP was made mandatory to force workers to save some of their current income for retirement. The goal is to overcome the shortsightedness of workers, especially younger Canadians, who do not save enough money to support themselves after retirement.

CPP/QPP initially had a “pay-as-you-go” structure, similar to how the OAS works. However, in 1997 an agreement among the federal, provincial, and territorial governments raised CPP contributions for both employers and employees and lowered future payouts to ensure CPP/QPP was partially funded and sustainable for at least the next half century. Once CPP/QPP contributors reach the age of 65, they can receive their full (earned) pension. In this way, CPP/QPP is a savings program, unlike OAS, which is financed out of current tax revenue with the aim of bringing the income of elderly Canadians above a threshold income.

Like CPP/QPP, the provision of free (and mandatory) education up to Grade 12 in Canada also helps to alleviate the problem of shortsightedness—in this case, underinvesting in education. As mentioned previously, education plays an important role in an individual’s financial well-being. Education not only helps raise people’s standard of living—on average the poor tend to have lower levels of education—but higher average levels of education in a country tend to result in fewer social problems and improved health outcomes. Although education can have high returns, households have an incentive to underinvest in it because it takes a long time to see the benefits (see Chapter 16 for the external benefits of education). To reduce the problem of underinvestment in education and to encourage the accumulation of human capital, all levels of government in Canada cooperate to provide free education at elementary and secondary levels and subsidize post-secondary education. The governments are, in effect, making education less expensive to encourage (or force) more people to get educated.

Employment Insurance (EI), although normally a smaller portion of government transfers than social pensions, is another key social insurance program. EI provides qualifying workers who lose their jobs with up to 55% of their insured income up to a yearly maximum insurable amount—$48 600 in 2014—for 14 to 45 weeks, depending on the unemployment rate in the region. (In response to the recession of 2008–2009, the federal government temporarily increased the maximum length by five weeks.) In Canada, both employers and employees are required to pay a payroll tax that finances the operation of EI programs. In 2014 the maximum annual employee premium was $913.63, while employers were required to pay 1.4 times their employees’ contributions.

Because the people who receive government transfers tend to be different from those who are taxed to pay for those transfers, the welfare state in Canada has the effect of redistributing income from some people to others. Each year Statistics Canada computes the amount and share of government transfers provided to the Canadians.

Table 18-4 shows the average total income, average government transfers received, and average income tax paid by families in different income groups in 2011. It is not surprising that there is an inverse relationship between income and average government transfers received. As a household’s income rises, it will be less reliant on government assistance, so the amount of government transfers received falls. Given the progressive tax system in Canada, as income rises, tax liabilities also increase because the ability to pay increases.

According to Table 18-4, the poorest 20% of Canadian households receive about 30% of the total government transfers and only pay about 1% of the total income tax. On the other hand, the richest 20% of Canadian households receive the smallest share of government transfers and pay more than 57% of the total income tax. This is a clear indication that the design of the welfare state programs and tax system in Canada is aimed at helping the poor and redistributing income from the rich to the poor.