Baker, M., J. Gruber, and K. Milligan, 2003, “The Retirement Incentive Effects of Canada’s Income Security Programs”, Canadian Journal of Economics, 36, No. 2, pp. 261– 90.
Baker, M., and D. Benjamin, 1999, “Early Retirement Provisions and the Labor Force Behavior of Older Men: Evidence from Canada”, Journal of Labor Economics, 17, No.4, pp.724– 56.
Battle, K., 2003, “Sustaining Public Pensions in Canada: A Tale of Two Reforms”, in Taste of Pie: Searching for Better Pension Provisions in Developed Countries edited by N. Takayama (Tokyo: Maruzen).
Burbridge, J., D. Fretz, and M.R. Veall, 1997, “Issues and Commentaries, Canadian and American Saving Rates and the Role of RRSPs”, Canadian Public Policy, XXIV, No.2, pp.259– 63.
Campolieti, M., 2001, “The Canada/Quebec Pension Plan Disability Program and the Labor Force Participation of Older Men”, Economic Letters, 70, No.3, pp.421– 26.
Gruber, J., 1999, “Social Security and Retirement in Canada”, in Social Security and Retirement Around the World, edited by J. Gruber and D.A. Wise (Chicago: The University of Chicago Press).
Gruber, J., D.A. Wise, 2001, “An International Perspective on Policies for an Aging Society”, National Bureau of Economic Research Working Paper No. 8103 (Cambridge, Massachusetts: National Bureau of Economic Research).
Hoffman, M., and B. Dahlby, 2001, “Pension Provision in Canada”, in Pension Systems and Retirement Incomes Across OECD Countries, edited by R. Disney and P. Johnson (Cheltenham: Edward Elgar).
Johnson, R., 2000, “The Effect of Old-Age Insurance on Male Retirement: Evidence From Historical Cross-Country Data”, FRBKC Research Division Working Paper RWP 00-09 (Kansas City: Federal Reserve Bank of Kansas City).
Kesselman, J.R., and F. Poschmann, 2001, “Expanding the Recognition of Personal Savings in the Canadian Tax System”, Canadian Tax Journal, 49, No.1, pp.40– 101.
Lise, J., 2001, “Is Canada’s Retirement Income System Working?”, Department of Finance Canada Working Paper No. 2003-02 (Ottawa: Department of Finance).
Milligan, K., 2003, “How Do Contribution Limits Affect Contributions To Tax-Preferred Savings Accounts?” Journal of Public Economics, 87, No.2, pp.253– 81.
Milligan, K.,, 2002, “Tax-Preferred Savings Accounts and Marginal Tax Rates: Evidence on RRSP Participation”, Canadian Journal of Economics, 35, No.3, pp.436– 56.
Organization of Economic Cooperation and Development (OECD), 2001, Ageing and Income: Financial Resources and Retirement in 9 OECD Countries (Paris: OECD).
Office of the Superintendent of Financial Institutions (OSFI), 2003, Annual Report 2002.03 (Ottawa: OSFI). Available on the internet at www.osfi.bsif.gc.ca.
Office of the Superintendent of Financial Institutions (OSFI), 2002, Actuarial Report (19th ) Supplementing the Actuarial Report on the Canada Pension Plan: As at 31 December 2000 (Ottawa: OSFI). Available on the internet at www.osfi.bsif.gc.ca.
Office of the Superintendent of Financial Institutions (OSFI), 2001, Actuarial Report (18th ) on the Canada Pension Plan: As at 31 December 2000 (Ottawa: OSFI). Available on the internet at www.osfi.bsif.gc.ca.
Smeeding, T.M., and D.H. Sullivan, 1988, “Generations and the Distribution of Economic Well-Being: A Cross-National View”, American Economic Review, 88, No.2, pp.254– 58.
Tompa, E., 1999, “Transitions to Retirement: Determinants of Age of Social Security Take Up”, Program for Research on Social and Economic Dimensions of An Aging Population (SEDAP) Research Paper No. 6 (Hamilton, Ontario: McMaster University).
Veall, M.R., 1999, “Did Tax Flattening Affect RRSP Contributions?” Research Institute for Quantitative Studies in Economics and Population (QSEP) Research Report No. 342 (Hamilton, Ontario: McMaster University).
Prepared by Martin Muhleisen.
Residents of the province of Quebec are covered by the separate Quebec Pension Plan (see below).
CPP premiums are tied to an individual’s pensionable earnings, defined as earnings up to Yearly Maximum Pensionable Earnings (YMPE)—which grows in line with the average industrial wage—less the Year’s Basic Exemption (YBE). Prior to the 1998 reforms, the YBE was set at one tenth of YMPE. CPP benefits are calculated by the following formula: CPP pension = 0.25 x (average YMPE over the previous 5 years) x (average ratio of pensionable earnings to YMPE over 85 percent of the individual’s working life). The working life is calculated by subtracting 18 years from the age when CPP benefits are first drawn, with up to 7 years of “drop-outs” being provided for periods when the individual is caring for a young child.
Provinces have the choice of rolling over non-marketable bonds placed with the CPP one more time until 2033. OSFI (2001) assumes that the ultimate asset mix will consist of 50 percent bonds and 50 percent equity.
The actuarial estimates assume a real rate of return of 4.5 percent and 5 percent on Canadian and U.S. equities, respectively, and of a 3.8 percent real return on bonds. Real average earnings are projected to grow at 1.1 percent over the long-run, and the steady-state inflation rate is projected at 3 percent. A 20 basis point increase in contribution rates would be required if the inflation rate were to equal 2 percent, ceteris paribus. Similarly, the contribution rate would have to increase by 40 basis points if the real rate of return were 1 percentage point lower.
These plans are typically registered at the provincial level, except for some 1,200 plans of companies operating in federally regulated areas of employment. These plans cover about 550,000 employees and are registered with and supervised by the Office of the Superintendent of Financial Institutions (OSFI, 2003).
The budget contained an increase in the amount of contributions to defined-contribution plans that can be deducted from taxable income from C$14,500 to C$18,000 by 2005. The maximum pension benefit permitted under defined-benefit plans was raised to C$2,000 per year of service by 2005 from the present ceiling of C$1,722. Both limits are indexed to average wage growth for subsequent years.
Two thirds of pension plans supervised by OSFI are DC plans.
According to a widely quoted UBS study, 49 of the largest 60 companies listed on in the TSX have DB plans. These plans had a combined funding shortfall of 3.2 percent of market cap at end-2002, compared with only 2.4 percent for S&P 500 companies.
Members of defined benefit plans are not insured against plan insolvency, except in the province of Ontario where the first C$1,000 per month of pension benefits is covered by a pension benefits guarantee fund.
The low-income rate is defined as the share of the population with disposable income less than half the median of the entire population.
The respective drop for males aged 65-69 is from 50 percent to 16 percent. For women, the trend toward earlier retirement is generally dominated by an age cohort effect in favor of higher participation in the labor market (Gruber, 1999).
For example, a worker in the tenth income percentile (no outside income) achieves a replacement ratio from public pension income of 42 percent if retiring at age 62, but would be subject to an effective 16 percent marginal tax rate if continuing to work. By contrast, the replacement rate for workers in the ninetieth percentile (with outside income) is 15 percent, and marginal tax rate 4 percent. At age 65, the low-income (high income) case receives a pension of 124 (32) percent of income at a 64 (18) percent marginal tax rate.
CPP benefits are reduced by 0.5 percent for each month that they are received before age 65, and increased by 0.5 percent for each month that retirement is postponed after age 65.
Most of the reductions in old-age poverty took place during the 1980s, owing to factors that are expected to weaken in the future (Myles, 2000). Chiefly among those is that public pension schemes reached maturity while real incomes of the working population stagnated during most of the 1980s and early 1990s, raising relative incomes of the elderly. The income distribution among seniors also became more even as the decline in elderly employment reduced a source of income concentration, whereas growing public retirement benefits were of a more equitable nature.
Milligan (2003) found that the option to accumulate unused contribution room has a negative short-term impact on RRSP contributions, as individuals attempt to smooth contributions over the life cycle.
To achieve actuarial fairness, the pension benefit would need to be raised from 0.5 percent to 0.7 percent for every month of retirement after reaching the age of 65.
To ensure political acceptance and mitigate the impact on workers close to retirement age, any increase in the retirement age would need to be gradual and phased in over a longer time frame.
With population aging, voting power is shifting toward the elderly generation, possibly precipitating a reallocation of public spending toward meeting old-age needs.