Bayoumi, T., “Aging Population and Canadian Public Pension Plans,” Working Paper. International Monetary Fund (Washington), WP/94/89 (1994).
Brown, R. L., “Economic Security in an Aging Population: Implications to the Design and Marketing of Life, Health and Pension Products in Canada,” (mimeographed, Canada: University of Waterloo, 1994).
Canadian Institute of Actuaries, Canadian Retirement Income Social Security Programs: Report of the Task Force on Social Security Financing. (November 1993).
Lam, N., Prince, M., and J. Cutt, “Reforming the Public Pension System in Canada: Retrospect and Prospect,” University of Victoria, Centre for Public Sector Studies, (1993).
Organization for Economic Cooperation and Development, “Pension Liabilities in the Seven Major Economies.” Working Party No. 1 of the Economic Policy Committee, (Paris: OECD, January 1993).
United States, Department of Commerce, An Aging World: International Population Report Series, 95-78, (Washington: Bureau of Census 1987).
Canada’s fertility rate began to rise in the early 1940s, from about 2.7 children per woman to 4.0 children per woman in 1960. It then declined sharply through the 1960s to 2.3 in 1970, 1.7 in 1980, and recovered to 1.8 by 1990 (where it is anticipated to remain through the early 2000s), a rate well short of the replacement rate of about 2.1. The resulting gap--almost 2 1/2 children per woman between the peak and the trough of the fertility cycle--has been larger than in the other G-7 countries. For this reason, Canada is expected to have the highest percentage increase in those aged 65 or older (about 135 percent from 1985 to 2025) among the G-7 countries. At current fertility rates, in particular, the proportion of the population 65 years and older would double within the next 50 years, while the proportion of the very old (85 and over) would grow fourfold. The peak of the crisis is anticipated in 2025, the average date of retirement for workers in the baby-boom generation (see Fellegi (1988) and Brown (1994), for further discussion of this issue).
The CPP/QPP also include benefits for the disabled, survivors of beneficiaries, orphans, and certain death benefits. Currently, about two-thirds of the benefits are directed to contributor pensions, about one-eighth to survivor pensions, and most of the remainder to disability benefits. The fraction of benefits directed to retirement and survivor pensions is projected to rise gradually to about 90 percent of outlays in the next few decades.
For the CPP this maximum value was $34,400 in 1994, with a basic exemption of 10 percent of this amount. This implies a rise in the average contribution rate from zero for incomes of $3,400 to a maximum of 4.5 percent for incomes of $34,000, followed by a gradual fall in the contribution rate for higher incomes.
The Plans’ projections of future pay-as-you-go rates depend on assumptions on demographic developments, earnings growth; interest rates, etc., which have been subject to scrutiny. Some studies (e.g., Lam, Prince, and Cutt, 1993) have estimated that long-run rates necessary to finance the current level of benefits may be as high as 16 percent.
The actuarially fair contribution rate is the rate at which the present value of future contributions of participants just starting in the plan is equal to the present value of the benefits they are projected to receive. The unfunded actuarial liability is the gap between current reserves and the level of reserves required to fund all future benefits to those who are currently over 18, assuming that the actuarially fair contribution rate is levied in the future.
Similar estimates are presented in OECD (1993), which estimates that the unfunded liability as a fraction of GDP is the highest (or second-highest, depending on assumptions) among the G-7.
An indicator of the individual impact of intergenerational transfers implied by the system is given by the ratio of pension benefits to contributions. Brown (1994) has estimated that ratio to be about 7 for the CPP/QPP for Canadians born in 1920, about 2 1/2 for Canadians born in 1960, and less than 1 for Canadians born today.
Since 1991, payments are recovered at a rate of 15 percent of individual income exceeding $53,215, leading to full recovery at a yearly income of about $84,000. As these limits are not fully indexed to the cost of living, inflation increases the extent of the recovery. OAS benefits of $0.4 billion are estimated to have been recovered in 1994/95.
The maximum income, including OAS, below which GIS is payable is about $15,700 for a single pensioner and about $23,800 for married pensioners. In October 1994, the maximum GIS monthly payment was $461 for single recipients and $300 for each married recipient, indexed to consumer inflation. Hence, maximum monthly benefits, including OAS, are $845 for a single pensioner and $685 for each married pensioner.
In January 1994, the maximum net family income (including OAS) below which SPA is payable was $25,200 for married SPA recipients and $15,000 for widowed SPA recipients.
Effective in 1994, this credit has become income-tested, being reduced by 15 percent of individual net income in excess of $25,921. Hence, the age credit is completely eliminated when an individual’s income reaches $49,100.
Brown (1994), for instance, has estimated RRSP tax benefits for individuals earning the average industrial wage, by computing the percentage of salary that must be saved to achieve an income replacement ratio of 70 percent at retirement. For an individual beginning to save at 25, for instance, this percentage would be of 4.1 percent if he were using RRSPs, and 10.2 percent if he were using nonregistered saving. Calculation over different saving periods also show that the percentage of saving required when using non-registered plans is about twice that required when using RRSPs.
For instance, more than 95 percent of tax-filers with income of $50,000 or more participated in RPP/RRSPs, against less than 70 percent from the $20,000-$30,000 income group.
See Blanchard and Fischer (1989) for a comprehensive discussion. Note, however, that no a priori conjecture can be made on the welfare implications of a pay-as-you-go system. Apart from the reasons that motivate the introduction of a public pension system in the first place (e.g., the belief that individuals may be too short-sighted to plan adequate retirement income), a shift from investment to consumption may correct a dynamic inefficiency reflected in excess saving, and thus be Pareto efficient. For realistic parameter values, however (i.e., when the real interest rate exceeds the rate of population growth), pay-as-you-go systems may be expected to cause intergenerational transfers that are not Pareto-efficient.
The low-income cutoff is computed by Statistics Canada for cities of 100,000-500,000 persons, and is viewed as a relatively generous definition of poverty. The low-income cutoffs for a single individual and a married couple in 1990 were $13,300 and $17,500, respectively.
Currently, residual life expectancy at retirement (65 years) is 17 years for men and 22 years for women, as opposed to 13 and 16 years, respectively, in 1961.