The Canadian Pension System Edward Tamagno Policy Associate Caledon Institute of Social Policy Ottawa, Canada General Assembly of the Japan Pension Research Council Tokyo, 8-98 9 September 2005
Outline of presentation Overview of the pension system Is the system meeting its objectives? Will the system continue to meet its objectives with an ageing society? Financial sustainability Evolving incomes of seniors Conclusions 2
Overview of the Canadian pension system 3
Core objectives Poverty avoidance: Ensuring a minimum income to the elderly Income replacement: Assisting seniors to maintain pre-retirement retirement living standards after retirement 4
Multi-pillared system World Bank model Zero pillar: Non-contributory, ensures minimal protection 1 st st pillar: Contributory, earnings-related related 2 nd nd pillar: Mandatory, individual accounts rd pillar: 3 rd Voluntary arrangements Other Old Age Security Canada/Quebec Pension Plans --- Canada Registered pension plans, retirement savings plans Universal health care insurance, etc. 5
Old Age Security Objective: Mainly poverty avoidance, but also income replacement for low- and modest-income workers Non-contributory Financed entirely from general tax revenues Entitlement based on age, length of residence in Canada and income 6
Old Age Security Benefit amounts (July-September 2005, monthly, maximum) Basic pension CAD (a) 476.97 Supplement (single) 566.87 Supplement (married) 369.24 Beneficiaries (March 2005) 4.1 M (b) Cost (2005/06, estimated) CAD 29.7 B (c) (a) CAD 1.00 = JYP 92 (b) M=Million (c) B=Billion 7
Canada/Quebec Pension Plans Objective: Income replacement Cover all employed & self-employed employed persons in Canada Quebec Pension Plan (QPP): Employees working in Quebec, self-employed employed persons residing in Quebec Canada Pension Plan (CPP): All others Coordinated through agreements between federal/quebec governments 8
Canada/Quebec Pension Plans Contributory, social insurance Contribution rate 9.9% Basic exemption CAD 3,500 Maximum contributory earnings (2005) CAD 41,100 Partially funded Financed entirely by contributions and investment earnings 9
Canada/Quebec Pension Plans Benefit amounts (2005, monthly, maximum) Retirement CAD 828.75 Disability 1,010.23 Survivor <65 (a) 462.42 Survivor 65+ 497.25 Children (b) 195.96 Death (one-time lump-sum) 2,500.00 (a) For QPP, CAD 410.31-710.37 (b) For QPP, CAD 62.22 10
Canada/Quebec Pension Plans Contributors (2002) 14.9 M of which: Canada Pension Plan Quebec Pension Plan Beneficiaries (March 2005) Cost (2005/06, estimated) Cost of which: 11.3 M 3.6 M 5.3 M (2005/06, estimated) CAD 32.8 B Canada Pension Plan Quebec Pension Plan CAD 24.9 B 7.9 B 11
Tax-assisted assisted retirement savings Objective: Income replacement Registered pension plans, registered retirement savings plans Contributions deductible from taxable income to a limit: 18% of earnings, up to CAD 16,500 (RRSPs, 2005) Investment earnings not subject to tax as long as they remain in plan Benefits/withdrawals subject to tax 12
Tax-assisted assisted retirement savings Registered pension plans: Contractual arrangements, usually between a company and its employees Voluntary no private company is required by law to have a pension plan; however, usually mandatory for employees of a company with a plan Regulated by federal and provincial laws Also subject to requirements of the Income Tax Act 13
Tax-assisted assisted retirement savings Registered pension plans (2003) Plans (number) 14,376 Members (number) Contributions (total) Pensions paid (number) Pensions paid (amount) Assets (total) 5.5 M CAD 23.5 B (a) 2.8 M (a) CAD 41.0 B CAD 794.1 B (a) Data for 2002 14
Tax-assisted assisted retirement savings Registered retirement savings plans: Individual retirement savings accounts Entirely voluntary Subject to requirements of the Income Tax Act Wide range of investment possibilities: mutual funds, guaranteed income certificates, stocks and bonds, etc. 15
Tax-assisted assisted retirement savings Registered retirement savings plans (2002) Plans (number) Contributors (number) Contributions (total) Benefits paid (number) Benefits paid (amount) Assets (total) N/A 6.0 M CAD 27.1 B N/A CAD 6.3 B CAD 292.5 B 16
Tax-assisted assisted retirement savings Cost of related tax expenditures (tax foregone because of deductibility of contributions and non-taxability of investment earnings, less tax collected on payments and withdrawals) Registered pension plans (2005, estimated) CAD 10.7 B Registered retirement savings plans (idem) CAD 12.6 B 17
Is the Canadian pension system meeting its objectives? 18
Objective: Poverty avoidance 25 Low-income: Seniors / All Canadians 21.3% Percent with low income 20 15 10 5 11.6% Seniors All Canadians 11.5% 6.8% 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: Statistics Canada 19
Objective: Poverty avoidance Low income: International comparisons Sweden Finland Canada Netherlands Denmark Germany Switzerland France Austria Italy United Kingdom Norway Belgium United States 2.7 5.2 5.3 6.4 6.6 7.0 8.4 9.8 10.3 12.2 13.7 14.5 15.1 20.7 0 5 10 15 20 25 Source: Luxemburg Income Study Working Papers Percent with low income 20
Objective: Income replacement Annual income, CAD, 2003 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 43,800 70% Average income: Seniors / Non-seniors 62,600 28,000 25,500 22,000 24,600 91% 89% Families Men living alone Women living along Source: Statistics Canada Seniors Non-seniors 21
Objective: Income replacement Replacement rates of public programs (OAS, C/QPP) 120 100 80 60 40 111% 73% 62% 62% 43% 38% Supplement C/QPP OAS-Basic 20 0 Single person, half average wage Single person, average wage Couple, one earner, half average wage Couple, one earner, average wage Couple, two earners, each half average wage Couple, two earners, each average wage 22 % of pre-retirement income
Will the Canadian pension system continue to meet its objectives with an ageing society? 23
Ageing of Canada s s population Percentage of population aged 65+ 25 23.0 Percentage 20 15 10 13.1 14.2 16.2 18.4 20.1 5 0 2005 2010 2015 2020 2025 2030 Source: Office of the Chief Actuary 24
Ageing of Canada s s population Ratio of persons 20-64 to persons 65+ 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 4.8:1 4.4:1 3.8:1 3.3:1 2.8:1 2.4:1 2005 2010 2015 2020 2025 2030 Source: Office of the Chief Actuary 25
Ageing of Canada s s population Life expectancy at age 65 25 20 16.8 17.6 20.8 19.1 21.7 20.9 23.5 Years 15 10 13.8 5 0 1966 2005 2025 2075 Males Females Source: Office of the Chief Actuary 26
Financial sustainability 27
Financial sustainability Prior to 1997 reform of the financing of the Canada Pension Plan (CPP): Plan was pay-as as-you go, with small reserve fund equal to two years costs (benefits and administration) Contribution rate was forecast to reach 14.2 percent by 2030 28
Financial sustainability With 1997 reform of CPP financing: Plan is partially funded (to reach about 25 percent of total liabilities), with reserve fund to exceed five years costs Contribution rate will remain at 9.9 percent ( steady( steady-state state rate ) for the indefinite future 29
Financial sustainability Principal elements of 1997 reform: Rapid increase to 9.9 percent contribution rate New investment strategy creation of the Canada Pension Plan Investment Board Freezing of the basic exemption at the 1997 level of CAD 3,500 30
31 31 Financial sustainability Financial sustainability +2.55 +2.55 9.9 9.9 7.35 7.35 2003 2003 +2.30 +2.30 9.4 9.4 7.10 7.10 2002 2002 +1.75 +1.75 8.6 8.6 6.85 6.85 2001 2001 +1.20 +1.20 7.8 7.8 6.60 6.60 2000 2000 +0.65 +0.65 7.0 7.0 6.35 6.35 1999 1999 +0.30 +0.30 6.4 6.4 6.10 6.10 1998 1998 +0.15 +0.15 6.0 6.0 5.85 5.85 1997 1997 Difference Difference Post Post-reform reform Pre Pre-reform reform Year Year Increase in the contribution rate
32 32 Financial sustainability Financial sustainability -4.30 4.30 9.9 9.9 14.2 14.2 2030 2030-0.20 0.20 9.9 9.9 10.1 10.1 2016 2016 +1.80 +1.80 9.9 9.9 8.10 8.10 2006 2006 +2.05 +2.05 9.9 9.9 7.85 7.85 2005 2005 +2.30 +2.30 9.9 9.9 7.60 7.60 2004 2004 Difference Difference Post Post-reform reform Pre Pre-reform reform Year Year Increase in the contribution rate
Financial sustainability New investment strategy: Objective: Increase the average annual real rate of return on the reserve fund to 4.1 percent Approach: Diversify the assets in the reserve fund to resemble those of occupational ( private( private or employer-sponsored) pension plans 33
Financial sustainability New investment strategy: Mechanism: Create an independent ( arms length ) ) agency the Canada Pension Plan Investment Board with a mandate to invest the reserve fund 34
Financial sustainability Design and operation of the Canada Pension Plan Investment Board based on three principles: Independence from political interference in investment decisions Accountability to stakeholders (contributors, pensioners, governments) Transparency 35
Financial sustainability 350 300 250 Canada Pension Plan: Income vs expenditures CAD billions 200 150 100 50 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Contributions Investment earnings Expenditures Source: Office of the Chief Actuary 36
8 Financial sustainability Public pensions as a percentage of Gross Domestic Product (GDP) Percent of GDP 7 6 5 4 3 2 1 Canada/Quebec Pension Plans Old Age Security 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Office of the Chief Actuary, Régie des Rentes du Québec 37
Evolving incomes of seniors 38
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Evolving incomes of seniors Sources of income (percentage), 2001 30.3 20.8 26.2 Source: Statistics Canada 36.3 21.2 19.3 23.4 20.3 34.3 All Men Women Other Employment Investments Private pensions C/QPP OAS 39
Evolving incomes of seniors CAD, constant 2001 35000 30000 25000 20000 15000 10000 5000 27,486 17,324 Average income +3.1% +7.8% 28,330 18,671 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 All Men Women Source: Statistics Canada 40
Evolving incomes of seniors 90 Sources of income (total amount) CAD billions, constant 2001 80 70 60 50 40 30 20 10 25.6 20.0 12.3 10.8 14.9 17.5 19.9 21.1 22.1 Other Employment Investments Private pensions C/QPP OAS 0 1991 1996 2001 Source: Statistics Canada 41
Evolving incomes of seniors 100% Sources of income (percentage) 80% 60% 40% 20% 0% 18.8 26.4 30.3 16.6 19.7 20.8 30.5 28.0 26.2 1991 1996 2001 Other Employment Investments Private pensions C/QPP OAS Source: Statistics Canada 42
Conclusions 43
Conclusions Overall, The Canadian pension system is meeting its core objectives of poverty avoidance and income replacement The system will continue to meet its objectives, and the incomes of seniors will continue to increase in real (after inflation) terms 44
Conclusions The Canadian pension system is financially sustainable over the long term However, problems remain (e.g. low income among some seniors, some disincentives to continued work) and require on-going policy attention 45