This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.


This paper examines economic developments and policies in Canada during 1990–95. Spurred by the robust growth in the United States and the easing of monetary conditions between 1991 and 1993, economic growth in Canada continued to strengthen during 1994. Real GDP grew by 4.5 percent in 1994 after growing by 2.2 percent in 1993 and 0.6 percent in 1992. Economic growth in 1994 was led by exports and investment in machinery and equipment. However, growth was more broadly based in 1994; private consumption strengthened, and there was a rebound in residential and nonresidential construction.

X. Public Support for the Elderly in Canada

1. Overview

Elderly support by the Federal Government in Canada includes traditional public pension schemes run on a pay-as-you-go basis; other federal income support schemes funded by general government revenues; and tax assistance for private retirement saving plans. Several provincial programs, mainly aimed at supporting those who benefit least from federally funded programs, also are provided.

The 1990 ratio of Canadian public pension expenditure to GDP, at about 4 percent, was the lowest among the G-7 countries, and the Canadian ratio of pensions-per-beneficiary to GDP-per-worker, at 17 percent, was also among the lowest in the G-7 countries (OECD (1993)). However, pension expenditure has grown rapidly in recent years in Canada. For instance, total real pension expenditure in Canada grew by more than 80 percent from 1980 to 1990, second only to Japan among the G-7 countries. The growth over the same period of real pension expenditure per beneficiary was 33 percent, the fastest among the G-7 countries, and Canada was the only G-7 country where the ratio of pensions-per-beneficiary to GDP-per-worker increased.

These trends are particularly worrisome in light of prospective demographic developments in Canada. Canada experienced a sharp baby boom in the post-World War II period, and the proportion of retirees to the working population is expected to rise sharply beginning in 2010. 1/ Since the public pension system is on a pay-as-you-go basis, these trends have resulted in a large unfunded liability--one of the largest among G-7 countries. As a result, either a sharp increase in contribution rates (by up to 9 percent of earnings), or a dramatic decline in benefits, will be required over the next decades.

2. Main programs for support of the elderly in Canada

Elderly support in Canada is implemented through a variety of (mainly federal) programs. The principal federal program, the Canada Pension Plan (the Quebec Pension Plan provides similar coverage for the residents of Quebec), is implemented on an extra-budgetary basis. Substantial budgetary support is also provided to the elderly by the Old Age Security, Guaranteed Income Supplement, and Spouses’ Allowance federal programs, as well by several federal programs of tax assistance. In addition, a variety of support programs are implemented at the provincial level.

The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) are compulsory, earnings-related pension programs whose costs are funded through payroll contributions on a pay-as-you-go basis, whereby current contributions are used to pay for current entitlements. 1/ The CPP and the QPP are very similar, and their costs move very closely over time. They are funded by a tax on earned income between a basic exemption and a maximum value indexed to the average industrial wage (the tax is split equally between the employee and employer). 2/ The CPP/QPP provide taxable benefits of 25 percent of pensionable earnings during the contributory period; adjustments are made to reflect the duration of participation in the plan, family status, allowances for periods of unusually low earnings, etc. CPP and QPP benefits totaled $19.9 billion in 1994, and are expected to rise to $21.3 billion in 1995.

The Plans target their reserve funds to twice their yearly expenditure. Both plans’ ratios of reserves to expenditure, however, are currently above their targets, at about 2 1/2 for the CPP and at almost 3 for the QPP. As a result, contribution rates are projected to rise more slowly in the next few years than the rate necessary to maintain reserves--the pay-as-you-go rate.

In particular, contribution rates rose from 5.2 percent of earnings in 1994 to 5.4 percent in 1995. The rates are projected to rise to 6.6 percent by the year 2000, rise further through 2030 (to 14.2 percent for the CPP and to 13.4 percent for the QPP), and remain roughly stable thereafter. The pay-as-you-go rate is also projected to rise, from the 1994 value of 7.4 percent for both plans, to 8.3 percent for the CPP and 7.8 percent for the QPP in 2000, and to 14.2 percent for the CPP and 13.5 percent for the QPP in 2030. The gap between the actual rate and the pay-as-you-go rate would be virtually closed by 2010, once reserves reached their target level. 1/

The CPP and QPPs represent the major source of prospective imbalance in Canada’s system of elderly support. The CPP’s latest actuarial report, in particular, estimates the actuarially fair contribution rate at 10 1/2 percent in 1993, or more than double the 1993 contribution rate of 5 percent. 2/ The corresponding unfunded liability was estimated at $490 billion (or about 85 percent of Canada’s GDP--excluding Quebec). Furthermore, this liability is projected to grow further, as long as the current contribution rate remains below the actuarially fair rate. 3/ Both indicators reflect the retirement of the baby-boom generation, projected from the year 2010 onward, which will cause either a sharp increase in premiums paid by the post-baby boomers, or a sharp reduction in benefits paid to the baby-boomers. 4/

In addition, the Old Age Security (OAS) program provides a monthly payment to all Canadians aged 65 and over. The payment amounted to $388 in October 1994, and is indexed to consumer inflation. These benefits are taxable and are recovered fully from high-income seniors at the end of the fiscal year. 5/ About $15 billion was paid by the OAS program in 1993/94. The Guaranteed Income Supplement (GIS) program provides a nontaxable monthly income supplement to low-income OAS recipients aimed at assuring a minimum income support. 1/ About $4.4 billion was paid in 1993-94 under the GIS program. The Spouses’ Allowance (SPA) program provides a nontaxable benefit of up to $759 per month (indexed to consumer inflation), to low-income individuals aged 60 to 64 who are the spouses or widow(er)s of OAS pensioners, commensurate with net family income. 2/ About $0.4 billion was paid in 1993-94 by the SPA program.

These three programs reach more than 3.2 million seniors, and total payments of almost $20 billion (recorded as direct government spending in the federal budget) are comparable in magnitude to those paid by the CPP/QPP. The aging of the Canadian population over the next decades is also bound to generate pressure on the Federal budget to finance the OAS/GIS/SPA programs and, based on current policies, the cost of these programs is likely to grow by about 60 per cent over the next 15 years. The benefits paid by the OAS/GIS/SPA programs should rise more slowly than for the CPP/QPP, however, primarily because OAS/GIS/SPA benefits are linked to price increases, whereas CPP/QPP benefits are linked to wage increases.

The February 1995 budget included two measures related to the OAS system. First, OAS payments will be paid out net of the high-income recovery amounts, based on previous year’s incomes, rather than being taxed back after payment. Second, OAS eligibility of recipients who are no longer residents will be assessed on the basis of world-wide income.

Federal elderly benefits in Canada also include two income tax credit programs and three programs of tax assistance for individual and employer-sponsored retirement saving plans. Among these, the Pension Income Credit was originally introduced to compensate pensioners for inflation losses on their pension income, and it allows individual taxpayers to claim a federal tax credit of up to $170. The Age Credit allows individuals of age 65 or more to claim a federal tax credit of up to $592. 3/ The combined effect of these two credits was to reduce tax revenues by about $1.8 billion in 1992/93.

More substantial tax support to the elderly is provided through Registered Retirement Savings Plans (RRPs), Registered Pension Plans (RRPs) and Deferred Profit-Sharing Plans (DPSPs), the latter two programs being employer-sponsored. These are tax-assisted pension vehicles that allow individuals and their employers to defer taxation on earnings and on investment income up to retirement age (or to withdrawal, in any case), within an overall limit on total individual saving in tax-assisted plans of 18 percent of earnings.

These three retirement saving plans, partly reformed in 1991, have very similar tax treatment, in that contributions to all of them are taxed at withdrawal (rather than at accrual). Specifically, RRSPs are individual saving plans that provide direct retirement income equal to the accumulated contributions and interest at retirement. RPPs include defined-benefit plans, which provide a pension calculated on the basis of earnings and years of benefits, and money-purchase plans, which provide retirement income equal to accumulated contributions and interest at retirement. RRSP contributors may also belong to an RPP.

The tax assistance associated with these programs reflects several elements: first, reinvested income is sheltered from taxes until withdrawal; second, the progressivity of income taxation allows individuals to enjoy lower average tax rates by contributing to the plan during the years of highest income; finally, the deferral of income until retirement enables individuals to enjoy various tax breaks granted to the elderly (mainly, the Pension Income and Age Credit programs). 1/

Participation in registered saving plans has increased substantially since the early 1980s. In 1993, 80 percent of all tax filers with incomes above $23,000 participated in such plans, 10 percentage points more than in 1981. Greater RRSP participation underlies much of this increase, as RRSP contributors have risen from 14 percent to 26 percent of all tax filers. Although the fraction of high-income earners participating in these plans remains higher than that of low-income earners, 2/ this gap has declined over time, and increases in registered saving participation have been rather uniform across income groups. RRSP data, in particular, shows that 50 percent of the 5.1 million contributors in 1993 had employment income below $33,800, just shy of the average industrial wage. Three-fourths of contributors had incomes less than $49,000.

The 1995 budget marginally reduced the tax benefits associated with tax-assisted savings. Most significantly, the limit on deductible RRSP contributions will be reduced from $15,500 to $13,500 for 1996 and 1997 and will be increased subsequently by $1,000 a year to reach $15,500 in 1999. Also, the RRSP over-contribution allowance of $8,000 will be reduced to $2,000 in 1996. The limit on contributions to money-purchase pension plans will also be reduced to $13,500 in 1996 and then increased by $1,000 a year to reach $15,500 in 1998.

Finally, there exists a variety of provincial programs for elderly support, most of which are strongly income-tested. These include income supplement schemes, tax credit for seniors, rental assistance, drug programs, etc. (See Courchene, 1994, for a discussion.) The main policy issue arising in the management of these programs relates to the heterogeneous structure of benefits across provinces, and to the nearly-confiscatory marginal rates of taxation implied by some of these programs (such the GAINS-A supplement of Ontario). This situation has been perceived as inequitable and conducive to under-reporting of income.

3. prospects for reform

Prospective demographic developments after the year 2010, and the current funding arrangements of CPP and QPP, mean that either benefits will need to be reduced from current levels or contributions sharply increased in the future. The risk is that future generations will prefer not to increase their contribution rate but will opt instead to reduce benefits for retirees. Thus, there is a danger that current funding arrangements will result in social strains as the baby-boomers begin to retire around 2010.

The pension system also has implications for investment and economic growth. Social security contributions are negative bequests, i.e., transfers from the young to the old. In general, retirees will offset only part of the transfer of wealth they receive from the young by increasing their bequests. Thus, by raising retirees’ wealth, a pay-as-you-go system reduces aggregate saving, investment, and output, in the long run. 1/

Demographic cycles such as that experienced in Canada in the post-World War II period tend to exacerbate these intergenerational transfers. For instance, in the case of Canada, where retirement benefits are kept constant and premia adjust to balance the system, premiums paid by members of large generations tend to be lower. When these individuals retire, their children must contribute to a large beneficiary base, and hence face above-average premiums, reducing their saving and investment.

The transition to a fully-funded system, though likely to be beneficial in the long run, has costs in the short and medium term, however. MULTIMOD simulations of a possible reform plan considered by Bayoumi (1994) usefully illustrate this tradeoff. Bayoumi (1994) calculates the rise in pension contribution rates necessary to neutralize demographic-induced transfers across generations. Bayoumi’s “reformed” premia would exceed their baseline values by 4.8 percent in 1995, then gradually fall to their baseline, and fall short of their baseline from 2020 onward, by up to 2 percent in 2030. MULTIMOD simulations suggest that this reform would cause a 1 1/2 percent rise in unemployment and a 2 to 2 1/2 percent fall in output in the short run, as pension contributions act, effectively, as labor taxes. By the year 2030, however, unemployment on the simulated path would be 1 percent lower and output and the capital stock about 1 percent higher than on the baseline. These simulations suggest that lower Canadian output in the short and medium run could be offset by higher output in the long run.

Consideration also has been given to reforming the system of elderly benefits provided by the federal budget. For example, it has been suggested to integrate OAS/GIS/SPA, public pension systems, tax credit schemes, and provincial programs, into a single unified program of income support for the elderly. A reform of this type would yield administrative savings and increase the system’s fairness and transparency.

There may also be scope for increasing the progressivity of OAS benefits, since at present roughly half of OAS/GIS/SPA benefits accrue to individuals with incomes in excess of the median population income (Table X-1). For instance, elimination of the Pension Income and Age tax credits, and recovery of OAS at the current 15 percent rate on family income above $25,000, could allow budgetary saving of $1.8 billion per year, or 0.2 percent of GDP. A more radical reform would replace the existing OAS and GIS transfers, as well as the Pension and Old Age tax credits, in favor of a family-income-tested benefit, to be recovered at the 50 percent rate up to the current GIS break-even level ($11,000 for a single pensioner), and at 25 percent thereafter. This reform could yield about 3.9 billion per year, or 0.4 percent of GDP.

Table X-1.

Canada: Distribution of Net Elderly Benefits by Household Income, 1994 1/

(In dollars, unless otherwise noted)

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Source: Department of Finance. All data in million of dollars, except household income which is in dollars. Does not include pension income credit and SPA received by nonelderly households.

Include OAS, GIS and SPA of head and spouse.

Households with at least one person age 65 or older.

Excludes widowed portion of SPA benefits.

Age credit fully income-tested in a mature system.

A drawback to this approach is that it would impose high marginal tax rates (in excess of 50 percent at the federal level alone) for certain income ranges, and increase the risk of tax evasion and (possibly) labor market distortion. Some observers have suggested that these risks would be mitigated by steepening the marginal tax schedule over relatively low income ranges, where labor supply may be less affected by changes in after-tax income and financial instruments for tax evasion may be less easily accessible. Indeed, the main reforms considered by the Government in this area involve recovery of OAS at incomes below $20,000.

Many observers also have analyzed the implications of an across-the-board reduction in overall elderly benefits. Taking 70 percent of pre-retirement earnings as the threshold that assures continuity of consumption through retirement, Horner and Poddar (1992) and Canada’s Department of Human Resource have estimated the current system to yield full income replacement to individuals with income of about $18,000 and one-earner couples with income of about $24,000 (in 1991 dollars). Using Statistics Canada’s low-income cutoff as a parameter, the combined effect of elderly support programs has been estimated to provide a replacement rate of about 90 percent for a single pensioner earning the low-income cutoff, and a rate of more than 100 percent for a married couple of pensioners earning the low-income cutoff. 1/ These estimates suggest that the generosity of the system may have exceeded the original intent to provide basic income support.

Increases in the eligibility age for public pensions have been implemented recently in several industrial countries (e.g., the United States, Sweden, and Italy). Given the increase in life expectancy in Canada in recent decades, there may be room for a gradual increase in the retirement age in Canada as well. 2/ Based on data through 1983, the Ontario Economic Council estimated the saving from raising the retirement age to be at least $1 billion in 1983 dollars for every year of increase in the eligibility age. Adjustment for inflation suggests current savings in excess of $2 billion (or 0.20 percent of GDP) for every year of increase of the retirement age, and population aging since 1981 suggests even larger savings. A recent study of the Canadian Institute of Actuaries projects a fall in CPP/QPP steady-state contribution rates by 1 percentage point for every year of increase in the eligibility age.

Another option to reduce the economic costs of Canada’s system of elderly support would be to increase reliance on nondistortionary taxation by financing CPP/QPP benefits out of general revenue, rather than from payroll taxes (Australia and New Zealand provide examples of this strategy). Measures aimed at harmonizing elderly benefits across provinces, and at separating the management of pension plans from transfers to the provinces, 3/ would also contribute to more efficient allocation of savings, both over time and geographically.


  • Bayoumi, T., “Aging Population and Canadian Public Pension Plans,” Working Paper. International Monetary Fund (Washington), WP/94/89 (1994).

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  • 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).

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  • Canada Pension Plan, Fifteenth Actuarial Report, as at 31 December (1994).

  • Canadian Institute of Actuaries, Canadian Retirement Income Social Security Programs: Report of the Task Force on Social Security Financing. (November 1993).

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  • Courchene, T.J., Social Canada in the Millennium, (Toronto: C.D. Howe Institute, 1994).

  • Department of Finance, Creating a Healthy Fiscal Climate, The Economic and Fiscal Update. (Ottawa: October 1994).

  • Department of Finance Canada, Federal Spending. (Ottawa 1994).

  • Fellegi, I.P., “Can We Afford an Aging Society?” Canadian Economic Observer. No. 4, pp. 1-34, (October 1988).

  • Horner, K., and Poddar, S., “Pension Reform in Canada,” (mimeographed, International Institute of Public Finance, (1992).

  • 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).

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  • 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).

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  • Old Age Security Program, First Statutory Actuarial Report, as at December 31. (1998).

  • Québec Pension Plan, Analyse Actuarielle du Régime de Rentes du Québec, en date du 31 Decembre. (1992).

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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.


Currently, CPP assets are lent to the provinces at federal government bond rates, which implies a subsidy to the provinces. Lam, Prince, and Cutt (1993) have estimated that investing the Plan’s assets at market rates might cut the equilibrium contribution rate to the CPP by half.