Ontario’s Public Consultations on Canada’s Retirement Income System
May 2010
Canada’s Retirement Income System: “The Three Pillars Approach”
- Canada’s pension system consists of three pillars:
- Universal government benefits for seniors (PILLAR 1)
- Canada Pension Plan (PILLAR 2)
- Employment Pension Plans and Individual Retirement Savings (PILLAR 3)
Canada’s Retirement Income System among OECD Countries
Old-age income safety-nets in Canada are amongst the highest in the OECD, helping Canada have one of the lowest poverty levels relative to average earnings.”
Figure 2.5, OECD Pensions at a Glance, 2009
PILLAR 1: Universal Government Benefits
- Federal seniors benefits include:
- Universal Old Age Security (OAS)
- Guaranteed Income Supplement (GIS)
- Spouses Allowance (SPA)
Ontario (and other provinces and territories) supplement federal benefits to low-income seniors
PILLAR 2: Canada Pension Plan
- Federal government and Provinces are joint stewards of the CPP
- Provides retirement, survivor, and disability benefits
- Universal coverage of all workers in all industries
- Employees and employers make equal contributions (4.95% each – 9.9% combined) on earnings up to annual maximum of $47,200 (2010)
- Defined Benefit – up to 25% of the average wage
- Fully portable
- Inflation-indexed to CPI
- Actuarially sound for the next 75 years
- CPPIB invests assets of $123.9 billion
PILLAR 3: Employment Pension Plans (EPPs/RPPs) & Individual Retirement Savings
1. Employment Pension Plans (EPPs/RPPs)
- Voluntary plans sponsored by an employer or union
- Defined Benefit (DB), Defined Contribution (DC) or Hybrid
- Maximum DB pension accrual is $2,494 per year of service (2010)
- Subject to federal or provincial pension benefits standards legislation
- Contributions are tax deductible and investment income is tax deferred
- Benefits are taxable
- Traditional DB coverage has been gradually declining
Ontario Employees Covered by DB Pensions
Per Cent
Sources: Statistics Canada, Pension Plans in Canada and Labour Force Survey.
PILLAR 3: EPPs/RPPs and Individual Retirement Savings
- Registered Retirement Savings Plans (RRSPs) / Registered Retirement Income Funds (RRIFs)
- Contributions to RRSPs are tax deductible
- RRSP withdrawals and RRIF income payments are taxable
- In 2006, federal RRSP tax expenditure was estimated at $10 billion (plus Provincial tax expenditures)
PILLAR 3: EPPs/RPPs and Individual Retirement Savings
- Other Savings
- Total savings rates in Canada are very low by historical standards
- Average family savings of $1,332 per year
- Savings are accumulated and then dispensed over a person’s life cycle
- Savings can be held in non-pension financial assets (including the new TFSA) and non-financial assets
Canada’s Retirement Income System: “The Three Pillars Approach”
Canadian Retirement Income System: Strengths
Strengths
- RIS has worked well for many Canadians
- Dramatic declines in senior poverty since 1970s
- Diversity of the RIS is a strength
Canadian Retirement Income System: Challenges
Challenges
- Market downturn in 2008 and low long-term interest rates
- Declining coverage in traditional pension plans
- Pillar 2 (CPP/QPP) provides lower benefits than in most other developed countries
- Questions about the ability of the existing system to deliver for tomorrow’s seniors
- Research suggests that 1/4 to 1/3 of Canadians may not be savings enough for their future retirement.
Canadian Retirement Income System:
Defining the Challenge
- Ontario research identifies the challenge for tomorrow’s seniors:
“The status quo is an option. However, it is an option that may leave a significant minority of people with moderate to high earnings facing a decline in their standard of living in retirement, and force many people to rely on sub-optimal pension and retirement savings institutions.” - Bob Baldwin
“There is… some evidence that not all working Canadians are saving enough… Further study is needed to determine the degree of saving inadequacy. - Jack Mintz
Canadian Retirement Income System:
Government Response
- Expert Commission on Pensions
- Review funding of DB pension plans and related matters
- Bill 236, Pension Benefits Amendment Act, 2010
- First major pension reform in Ontario in over 20 years
- Premier McGuinty calls for National Pension Summit
- FPT Working Group on Retirement Income Adequacy
- Ontario research by Bob Baldwin
- Federal research directed by Jack Mintz
Canadian Retirement Income System:
Key Options
- Major stakeholder proposals for reform:
- Expansion of public pensions (CPP)
- Supplementary DC pension plans
- Pension Innovation
- Reforms to Tax Assistance
Key Questions for Discussion
- Why do we need to strengthen Canada’s retirement income system?
- In your view what research or evidence demonstrates that people are not saving enough for retirement?
- How would you define “enough”, and how much weight should be placed on personal choice?
- What are some of the possible options or combination of options that the government should consider in strengthening Canada’s retirement income system for tomorrow’s seniors?
- How would your preferred options or proposal be implemented?
- How would your proposal work?
- What do you think it might cost?
- How would costs be allocated among employees, employers, etc.?
- Would it be voluntary (e.g. opt-out) or mandatory?
- How might other stakeholders be affected?
