Archived - Backgrounder: The Retirement Income Landscape in Canada

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Built on a Strong Foundation

Canada’s retirement income system has been recognized around the world by expert groups like the Organisation for Economic Co-operation and Development (OECD) as a model that succeeds in reducing poverty among Canadian seniors and in providing high levels of income replacement to retired workers.

Taken together, the system is based on a balanced mix of public and private responsibility, as well as compulsory and voluntary vehicles, that:

  1. provides a basic minimum pension for Canadians
  2. ensures a minimum amount of earnings replacement for working Canadians, and
  3. offers additional opportunities for voluntary retirement saving.

It both supports and draws upon the strength of a sound financial sector.

And it complements the Government’s overall economic objectives of jobs and growth.

The success of this model rests on its three-pillar approach:

The first pillar is made up of the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) programs, which provide a basic minimum income for seniors. This is essentially the “safety net” pillar of the system. As such, benefits are phased out as income rises. The federal government currently provides $39 billion in OAS/GIS benefits per year to about 5 million Canadians out of general revenues. Both OAS and GIS benefits are adjusted for inflation on a quarterly basis.

The second pillar is the Canada Pension Plan (CPP) and the Québec Pension Plan (QPP). These are mandatory, public, defined benefit pension plans that provide a basic level of earnings replacement for all Canadian workers. There are currently 16.5 million workers contributing to the CPP/QPP, with these programs paying $44 billion in benefits per year to 6.5 million beneficiaries. Both plans provide a “defined benefit” in retirement based on an individual's earnings. They are financed by employer and employee contributions, the contribution rate being 9.9 per cent of earnings, shared equally between employees and employers. Both plans also provide ancillary benefits, such as disability and survivor benefits.

Unlike the first-pillar programs, the CPP is not funded from general government revenues. Rather, operating at arm’s length from governments, the Canada Pension Plan Investment Board is responsible for prudently investing CPP contributions not being used to pay current benefits in a diversified portfolio of assets to serve the best interests of CPP contributors and beneficiaries.

Canada’s 13 provincial and territorial Finance Ministers, along with the federal Minister of Finance, completed their most recent statutory triennial review of the plan on May 25, 2009 and concluded that the CPP is sustainable for the next 75 years at the current contribution rate.

The third pillar of Canada’s retirement income system includes tax-assisted private savings opportunities to help and encourage Canadians to accumulate additional savings for retirement.

This includes Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs).

RPPs are sponsored by employers, on a voluntary basis, and can be either defined contribution or defined benefit, with employers (and often employees) responsible for making contributions.

RRSPs are voluntary, individual, defined contribution savings plans. Employers may provide a “group RRSP” for employees, and may remit a share of contributions on behalf of their employees.

Contributions to RPPs and RRSPs are deductible from income for tax purposes and investment income earned in these plans is not subject to income tax. Pension payments and withdrawals are included in income and taxed at regular rates.

To provide comparable retirement savings opportunities to Canadians regardless of the type of plan in which they participate, RPP and RRSP contributions and benefits are subject to comprehensive integrated annual limits. The annual contribution limits for RRSPs and defined contribution RPPs are designed to allow a retirement income comparable to that obtainable from a defined benefit RPP. Unused RRSP contribution room is fully carried forward to be available in future years.

The cost of tax assistance provided on retirement savings is currently estimated at approximately $20 billion per year in forgone revenue for the federal government, and about half that amount in forgone provincial revenue.

All in all, these three pillars of Canada’s retirement income system work together to support Canadians’ retirement in a way that is effective and fair.

Shoring up the Pillars

The Government of Canada has taken ongoing action to enhance some of the existing structures of this system—ones with a proven record of effectiveness.

  • In 2009, it consulted Canadians from coast to coast and introduced a number of changes to the framework for federally regulated RPPs. Improvements included ensuring that an employer fully funds benefits if the pension plan is terminated and providing sponsors of defined benefit pension plans more funding flexibility.
  • Also in 2009, Canada’s governments completed their mandated triennial review of the CPP, which modernized the plan to better reflect how Canadians currently live, work and retire.
  • Just recently, the 2011 budget announced a new GIS top-up benefit for Canada’s most vulnerable seniors. Seniors with little or no income other than OAS and GIS are receiving additional annual benefits of up to $600 for single seniors and $840 for couples, benefitting 680,000 seniors across Canada.

Several improvements were also introduced to the tax rules for RPPs and RRSPs to support work and saving by older Canadians and to provide sponsors of defined benefit pension plans with more funding flexibility.

The Government also introduced measures that complement these improvements.

All told, it provided $2.3 billion in additional annual targeted tax relief to seniors and pensioners through measures such as pension income splitting, increases in the Age Credit amount, and a doubling of the maximum amount of income eligible for the Pension Income Credit.

And it introduced the Tax-Free Savings Account, a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet their lifetime savings needs, including retirement savings.

The Research Working Group on Retirement Income Adequacy

However, concerns related to retirement income adequacy and pension coverage emerged in the wake of the 2008 financial crisis and with the release of several expert reports examining the effectiveness of provincial legislative frameworks for employer-sponsored RPPs.

In response, together with the provinces and territories, the Government of Canada embarked on an examination of the question of retirement income adequacy.

Canada’s Finance Ministers began by setting up a joint federal-provincial research working group in May 2009 to conduct an in-depth examination of retirement income adequacy in Canada.

The group’s summary report concluded that overall, the Canadian retirement income system is performing well and providing Canadians with an adequate standard of living upon retirement.

It indicated that most low-income seniors have adequate income replacement from public pensions, with annual retirement incomes equal to—or in some cases more than—income earned during their working lives.

A 2009 OECD paper cited in the report shows that the Canadian poverty rate in the mid-2000s among seniors was, at 4.4 per cent, one of the lowest in the OECD, compared to an OECD average of 13.3 per cent (the poverty rate is defined as 50 per cent of median income in a country).

The disposable income of Canadians aged 65 years or over is about 90 per cent of the average disposable income of all Canadians, third highest of selected OECD countries.

However, the report also found that some Canadian households, especially modest- and middle-income households, may be at risk of undersaving for retirement.

With these findings in hand, Ministers tasked senior officials to work collaboratively to analyze the wide range of ideas that had been put forward with a view to effectively addressing the issues identified in the research report.

To support this work, the Government of Canada launched online consultations and a series of cross-country roundtable discussions, speaking engagements and town hall meetings to gather input directly from Canadians on ensuring the ongoing strength of Canada’s retirement income system.

The Introduction of the PRPP Framework

The results of this exhaustive research effort were the focus for discussion at the Finance Ministers Meeting in December 2009.

In June 2010, following the analysis of various proposals and consultations, federal, provincial and territorial governments agreed to continue work reviewing options to improve the CPP, including considering a modest expansion to the program, and to look at other ways to improve Canada’s retirement income system.

However, employers, especially small businesses, raised concerns about accommodating the increased mandatory deductions that would be associated with an expanded CPP at a time of tentative recovery, and its impact on hiring decisions and the broader economy.

As an expansion would require higher CPP contributions from employees, employers and the self-employed, given the continuing fragility of Canada’s economic recovery, the Government understands that now is not the time to increase CPP contributions.

This led to priority being given to the PRPP framework and the announcement of the initiative at the subsequent Finance Ministers Meeting in December 2010.

Implementing the PRPP Framework

As the PRPP framework was being developed, officials engaged with key stakeholders to ensure these new plans will meet the needs of employees, employers and those entities that may offer PRPPs once they are implemented.

Minister of State (Finance) Ted Menzies met directly with provincial and territorial Finance Ministers across Canada in support of this process.

Legislation implementing the federal portion of the PRPP framework was introduced in Parliament on November 17, 2011.

Provinces will need to introduce their own enabling legislation.

In addition, the tax rules for PRPPs are being developed by the Government of Canada and will be released in draft for comment shortly. The PRPP tax rules will apply to both federally and provincially regulated PRPPs.

Canadians want their governments to act on their priorities and deliver results on a timely basis, and the PRPP is a prime example of what can be accomplished for Canadians when they do.

The Government of Canada is looking forward to provinces implementing the framework in a timely manner to help Canadians reach their retirement objectives.