Academic journal article IRPP Study

Unfinished Business: Pension Reform in Canada

Academic journal article IRPP Study

Unfinished Business: Pension Reform in Canada

Article excerpt

The plan to enhance CPP benefits announced in June 2016 will provide little benefit to low-income earners, and it fails to take into account the impact of demographic and labour market changes on the retirement income system.

Le programme d'amélioration des prestations du RPC annoncé en juin 2016 offrira peu d'avantages aux salariés a faible revenu, et ne tient pas compte des répercussions des changements démographiques et de l'évolution du marché du travail sur le systéme de revenu de retraite.

Since taking office in the fall of 2015, the Liberal government has made important changes to the publicly administered components of Canada's retirement income system (RIS) to fulfill campaign promises and budget commitments. The government has

* restored the age of eligibility for benefits under Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) to 65;

* agreed with the provinces on an increase in benefits provided by the Canada Pension Plan (CPP), to be implemented starting in 2019;1 and

* increased the top-up on GIS benefits for single elderly persons as of July 2016.

The first and second of these changes were designed to undo actions of the previous government. The Conservatives had passed legislation that would have gradually increased the age of eligibility for OAS and GIS from 65 to 67 starting in 2023, and in 2013 they had brought an end to four years of discussions with the provinces about a possible enhancement of CPP benefits. The GIS increase, on the other hand, extends and enriches the top-up introduced by the Conservatives in 2012.

Each of these reforms was a discrete initiative, and each, seen on its own, constitutes a step forward for Canada's RIS. But when taken together, they are somewhat problematic and incomplete. They are problematic because the potential beneficial effect of a change to one component of the RIS can be greatly diminished when full account is taken of the interactions among all the various components of the RIS and between the RIS and personal income taxes. This is especially true of increases in CPP benefits for low-income earners. The changes are also incomplete in that they fail to take into account some readily identifiable and consequential changes in the environment in which the RIS operates, including labour market participation behaviour, financial market conditions and longevity.

In view of these general concerns, this study will explore the ways in which the interactions among the various components of the RIS and the tax system affect the outcomes of a CPP benefits increase; identify a number of issues relating to OAS, GIS and CPP that need further attention in light of ongoing economic, demographic and social changes; and discuss some governance issues to be addressed with respect to the CPP.

We find that because of the interactions between increased CPP benefits and other parts of the RIS and the tax system, low-income earners will derive little benefit from the recently agreedupon reforms. Moreover, in the years ahead, any earnings replacement gains for low-income earners from CPP enhancement may be offset by losses in OAS benefits. Given diverse and changing patterns of entry into the labour force and retirement, we also question whether age should remain the main criterion for establishing eligibility for OAS, GIS and CPP benefits. Finally, we flag the need to minimize overlapping tax and tax-back rates, which serve as disincentives both to save for retirement and to take employment at an older age.

Canada's Retirement Income System

Canada's RIS has three pillars (see table 1). Pillar 1 is dominated by two public programs, OAS and GIS, but also includes the Allowance, a federal income-tested program, which targets a subset of the 60-to-64-year-old population, as well as provincial supplements to GIS in all provinces except New Brunswick, Prince Edward Island and Quebec.

The basic OAS provides the same dollar amount of monthly benefit to all Canadians aged 65 and over who meet residence requirements. …

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