the canadian pension system - hitotsubashi university · 2005-09-02 · of the canada pension plan...
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The CanadianThe CanadianPension SystemPension System
Edward TamagnoEdward TamagnoPolicy AssociatePolicy Associate
Caledon Institute of Social PolicyCaledon Institute of Social PolicyOttawa, CanadaOttawa, Canada
General Assembly of theGeneral Assembly of theJapan Pension Research CouncilJapan Pension Research Council
Tokyo, 8Tokyo, 8--9 September 20059 September 2005
22
Outline of presentationOutline of presentation
Overview of the pension systemOverview of the pension systemIs the system meeting its objectives?Is the system meeting its objectives?Will the system continue to meet its Will the system continue to meet its objectives with an ageing society?objectives with an ageing society?•• Financial sustainabilityFinancial sustainability•• Evolving incomes of seniorsEvolving incomes of seniorsConclusionsConclusions
33
Overview of theOverview of theCanadian pension systemCanadian pension system
44
Core objectivesCore objectives
Poverty avoidance:Poverty avoidance:Ensuring a minimum income to the elderlyEnsuring a minimum income to the elderly
Income replacement:Income replacement:Assisting seniors to maintainAssisting seniors to maintainprepre--retirement living standards after retirement living standards after retirementretirement
55
MultiMulti--pillared systempillared system
Universal health care Universal health care insurance, etc.insurance, etc.
OtherOther
Registered pension plans, Registered pension plans, retirement savings plansretirement savings plans
33rdrd pillar:pillar:Voluntary arrangementsVoluntary arrangements
------22ndnd pillar:pillar:Mandatory, individual accountsMandatory, individual accounts
Canada/QuebecCanada/QuebecPension PlansPension Plans
11stst pillar:pillar:Contributory, earningsContributory, earnings--relatedrelated
Old Age SecurityOld Age Security““ZeroZero”” pillar:pillar:NonNon--contributory, ensures contributory, ensures minimal protectionminimal protection
CanadaCanadaWorld Bank modelWorld Bank model
66
Old Age SecurityOld Age Security
Objective: Mainly poverty avoidance, Objective: Mainly poverty avoidance, but also income replacement forbut also income replacement forlowlow-- and modestand modest--income workersincome workersNonNon--contributorycontributoryFinanced entirely from general tax Financed entirely from general tax revenuesrevenuesEntitlement based on age, length of Entitlement based on age, length of residence in Canada and incomeresidence in Canada and income
77
Old Age SecurityOld Age Security
Benefit amountsBenefit amounts(July(July--September 2005, monthly, maximum)September 2005, monthly, maximum)
•• Basic pensionBasic pension CADCAD(a)(a) 476.97 476.97 •• Supplement (single)Supplement (single) 566.87566.87•• Supplement (married)Supplement (married) 369.24369.24Beneficiaries Beneficiaries (March 2005)(March 2005) 4.1 M4.1 M(b)(b)
Cost Cost (2005/06, estimated)(2005/06, estimated) CAD 29.7 BCAD 29.7 B(c)(c)
(a)(a) CAD 1.00 = JYP 92 CAD 1.00 = JYP 92 (b)(b) M=Million M=Million (c)(c) B=BillionB=Billion
88
Canada/Quebec Pension PlansCanada/Quebec Pension Plans
Objective: Income replacementObjective: Income replacementCover all employed & selfCover all employed & self--employed employed persons in Canadapersons in Canada•• Quebec Pension Plan (QPP): Employees Quebec Pension Plan (QPP): Employees
working in Quebec, selfworking in Quebec, self--employed employed persons residing in Quebecpersons residing in Quebec
•• Canada Pension Plan (CPP): All othersCanada Pension Plan (CPP): All others•• Coordinated through agreements Coordinated through agreements
between federal/Quebec governmentsbetween federal/Quebec governments
99
Canada/Quebec Pension PlansCanada/Quebec Pension Plans
Contributory, social insuranceContributory, social insurance•• Contribution rateContribution rate 9.9%9.9%•• Basic exemptionBasic exemption CAD 3,500CAD 3,500•• Maximum contributoryMaximum contributoryearnings earnings (2005)(2005) CAD 41,100CAD 41,100
Partially fundedPartially fundedFinanced entirely by contributions Financed entirely by contributions and investment earningsand investment earnings
1010
Canada/Quebec Pension PlansCanada/Quebec Pension Plans
Benefit amountsBenefit amounts(2005, monthly, maximum)(2005, monthly, maximum)
•• RetirementRetirement CAD 828.75 CAD 828.75 •• DisabilityDisability 1,010.231,010.23•• Survivor Survivor <65<65 (a)(a) 462.42462.42•• Survivor 65+Survivor 65+ 497.25497.25•• ChildrenChildren (b)(b)195.96195.96•• Death Death (one(one--time lumptime lump--sum)sum) 2,500.002,500.00
(a)(a) For QPP, CAD 410.31For QPP, CAD 410.31--710.37 710.37 (b)(b) For QPP, CAD 62.22For QPP, CAD 62.22
1111
Canada/Quebec Pension PlansCanada/Quebec Pension Plans
Contributors Contributors (2002)(2002) 14.9 M14.9 Mof which:of which:
•• Canada Pension PlanCanada Pension Plan 11.3 M11.3 M•• Quebec Pension PlanQuebec Pension Plan 3.6 M3.6 M
Beneficiaries Beneficiaries (March 2005)(March 2005) 5.3 M5.3 MCost Cost (2005/06, estimated)(2005/06, estimated) CAD 32.8 BCAD 32.8 Bof which:of which:
•• Canada Pension PlanCanada Pension Plan CAD 24.9 BCAD 24.9 B•• Quebec Pension PlanQuebec Pension Plan 7.9 B7.9 B
1212
TaxTax--assisted retirement savingsassisted retirement savings
Objective: Income replacementObjective: Income replacement
Registered pension plans,Registered pension plans,registered retirement savings plansregistered retirement savings plansContributions deductible from taxable Contributions deductible from taxable income to a limit: 18% of earnings, income to a limit: 18% of earnings, up to CAD 16,500 up to CAD 16,500 (RRSPs, 2005)(RRSPs, 2005)
Investment earnings not subject to Investment earnings not subject to tax as long as they remain in plantax as long as they remain in planBenefits/withdrawals subject to taxBenefits/withdrawals subject to tax
1313
TaxTax--assisted retirement savingsassisted retirement savings
Registered pension plans:Registered pension plans:•• Contractual arrangements, usually Contractual arrangements, usually
between a company and its employeesbetween a company and its employees•• Voluntary Voluntary –– no private company is no private company is
required by law to have a pension plan; required by law to have a pension plan; however, usually mandatory for however, usually mandatory for employees of a company with a planemployees of a company with a plan
•• Regulated by federal and provincial lawsRegulated by federal and provincial laws•• Also subject to requirements of the Also subject to requirements of the
Income Tax ActIncome Tax Act
1414
TaxTax--assisted retirement savingsassisted retirement savings
Registered pension plans Registered pension plans (2003)(2003)
•• Plans (number)Plans (number) 14,37614,376•• Members (number)Members (number) 5.5 M5.5 M•• Contributions (total)Contributions (total) CAD 23.5 BCAD 23.5 B•• Pensions paid (number)Pensions paid (number) (a)(a) 2.8 M2.8 M•• Pensions paid (amount)Pensions paid (amount) (a)(a) CAD 41.0 BCAD 41.0 B•• Assets (total)Assets (total) CAD 794.1 BCAD 794.1 B
(a)(a) Data for 2002Data for 2002
1515
TaxTax--assisted retirement savingsassisted retirement savings
Registered retirement savings plans:Registered retirement savings plans:•• Individual retirement savings accountsIndividual retirement savings accounts•• Entirely voluntaryEntirely voluntary•• Subject to requirements of the Subject to requirements of the Income Income
Tax ActTax Act•• Wide range of investment possibilities: Wide range of investment possibilities:
mutual funds, guaranteed income mutual funds, guaranteed income certificates, stocks and bonds, etc.certificates, stocks and bonds, etc.
1616
TaxTax--assisted retirement savingsassisted retirement savings
Registered retirement savings plansRegistered retirement savings plans(2002)(2002)
•• Plans (number)Plans (number) N/AN/A•• Contributors (number)Contributors (number) 6.0 M6.0 M•• Contributions (total)Contributions (total) CAD 27.1 BCAD 27.1 B•• Benefits paid (number)Benefits paid (number) N/AN/A•• Benefits paid (amount)Benefits paid (amount) CAD 6.3 BCAD 6.3 B•• Assets (total)Assets (total) CAD 292.5 BCAD 292.5 B
1717
TaxTax--assisted retirement savingsassisted retirement savings
Cost of related Cost of related ““tax expenditurestax expenditures””(tax foregone because of deductibility (tax foregone because of deductibility of contributions and nonof contributions and non--taxability of taxability of investment earnings, investment earnings, lessless tax collected tax collected on payments and withdrawals)on payments and withdrawals)•• Registered pensionRegistered pension
plans plans (2005, estimated)(2005, estimated) CAD 10.7 BCAD 10.7 B•• Registered retirement Registered retirement
savings plans savings plans (idem)(idem) CAD 12.6 BCAD 12.6 B
1818
Is the Canadian pension system Is the Canadian pension system meeting its objectives?meeting its objectives?
1919
Objective: Poverty avoidanceObjective: Poverty avoidance
0
5
10
15
20
25
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Low-income: Seniors / All Canadians
Seniors
All Canadians
21.3%
11.6%
11.5%
6.8%
Source: Statistics Canada
Perc
ent
with low
inco
me
2020
Objective: Poverty avoidanceObjective: Poverty avoidance
20.715.1
14.513.7
12.210.3
9.88.4
7.06.66.4
5.35.2
2.7
0 5 10 15 20 25
Low income: International comparisonsSwedenFinlandCanada
NetherlandsDenmarkGermany
Italy
FranceAustria
United States
Switzerland
United KingdomNorwayBelgium
Source: Luxemburg Income Study Working Papers
Percent with low income
2121
Objective: Income replacementObjective: Income replacement
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Families Men living alone Women living along
Seniors Non-seniors
43,800
62,600
25,50028,000
22,00024,600
70%
Source: Statistics Canada
Annual
inco
me,
CAD
, 2
003
Average income:Seniors / Non-seniors
91% 89%
2222
Objective: Income replacementObjective: Income replacement
0
20
40
60
80
100
120
SupplementC/QPPOAS-Basic
Replacement rates ofpublic programs (OAS, C/QPP)
Single pers
on,
half avera
ge wage
Single pers
on,
average w
age
Couple, one earn
er,
half avera
ge wage
Couple, one earn
er,
average w
age
% o
f pre
-ret
irem
ent
inco
me
Couple, two earn
ers,
each h
alf avera
ge wage
Couple, two earn
ers,
each avera
ge wage
73%
43%
111%
62% 62%
38%
2323
Will the Canadian pension system Will the Canadian pension system continue to meet its objectives with continue to meet its objectives with
an ageing society?an ageing society?
2424
Ageing of CanadaAgeing of Canada’’s populations population
0
5
10
15
20
25
2005 2010 2015 2020 2025 2030
Perc
enta
ge
Percentage of population aged 65+
13.114.2
16.218.4
20.1
23.0
Source: Office of the Chief Actuary
2525
Ageing of CanadaAgeing of Canada’’s populations population
00.5
11.5
22.5
33.5
44.5
5
2005 2010 2015 2020 2025 2030
Ratio of persons 20-64 to persons 65+4.8:1
4.4:1
3.8:13.3:1
2.8:1
2.4:1
Source: Office of the Chief Actuary
2626
Ageing of CanadaAgeing of Canada’’s populations population
13.8
17.619.1
20.9
16.8
20.8 21.723.5
0
5
10
15
20
25
1966 2005 2025 2075
Males Females
Life expectancy at age 65
Source: Office of the Chief Actuary
Yea
rs
2727
Financial sustainabilityFinancial sustainability
2828
Financial sustainabilityFinancial sustainability
Prior to 1997 reform of the financing Prior to 1997 reform of the financing of the Canada Pension Plan (CPP):of the Canada Pension Plan (CPP):•• Plan was payPlan was pay--asas--you go, with small you go, with small reserve fund equal to two yearsreserve fund equal to two years’’costs (benefits and administration)costs (benefits and administration)
•• Contribution rate was forecast to Contribution rate was forecast to reach 14.2 percent by 2030reach 14.2 percent by 2030
2929
Financial sustainabilityFinancial sustainability
With 1997 reform of CPP financing:With 1997 reform of CPP financing:•• Plan is partially funded (to reach Plan is partially funded (to reach about 25 percent of total liabilities), about 25 percent of total liabilities), with reserve fund to exceed five with reserve fund to exceed five yearsyears’’ costscosts
•• Contribution rate will remain atContribution rate will remain at9.9 percent (9.9 percent (““steadysteady--state ratestate rate””) ) for the indefinite futurefor the indefinite future
3030
Financial sustainabilityFinancial sustainability
Principal elements of 1997 reform:Principal elements of 1997 reform:•• Rapid increase to 9.9 percent Rapid increase to 9.9 percent contribution ratecontribution rate
•• New investment strategy New investment strategy –– creation creation of the Canada Pension Plan of the Canada Pension Plan Investment BoardInvestment Board
•• Freezing of the basic exemption at Freezing of the basic exemption at the 1997 level of CAD 3,500the 1997 level of CAD 3,500
3131
Financial sustainabilityFinancial sustainability
+2.55+2.559.99.97.357.3520032003
+2.30+2.309.49.47.107.1020022002
+1.75+1.758.68.66.856.8520012001
+1.20+1.207.87.86.606.6020002000
+0.65+0.657.07.06.356.3519991999
+0.30+0.306.46.46.106.1019981998
+0.15+0.156.06.05.855.8519971997
DifferenceDifferencePostPost--reformreformPrePre--reformreformYearYear
Increase in the contribution rate
3232
Financial sustainabilityFinancial sustainability
--4.304.309.99.914.214.220302030
……………………
--0.200.209.99.910.110.120162016
……………………
+1.80+1.809.99.98.108.1020062006
+2.05+2.059.99.97.857.8520052005
+2.30+2.309.99.97.607.6020042004
DifferenceDifferencePostPost--reformreformPrePre--reformreformYearYear
Increase in the contribution rate
3333
Financial sustainabilityFinancial sustainability
New investment strategy:New investment strategy:•• Objective: Increase the average Objective: Increase the average annual real rate of return on the annual real rate of return on the reserve fund to 4.1 percentreserve fund to 4.1 percent
•• Approach: Diversify the assets in Approach: Diversify the assets in the reserve fund to resemble those the reserve fund to resemble those of occupational (of occupational (““privateprivate”” or or employeremployer--sponsored) pension planssponsored) pension plans
3434
Financial sustainabilityFinancial sustainability
New investment strategy:New investment strategy:•• Mechanism: Create an independent Mechanism: Create an independent ((““armsarms’’ lengthlength””) agency ) agency –– the the Canada Pension Plan Investment Canada Pension Plan Investment Board Board –– with a mandate to invest with a mandate to invest the reserve fundthe reserve fund
3535
Financial sustainabilityFinancial sustainability
Design and operation of the Canada Design and operation of the Canada Pension Plan Investment Board based Pension Plan Investment Board based on three principles:on three principles:•• Independence from political Independence from political interference in investment decisionsinterference in investment decisions
•• Accountability to stakeholders Accountability to stakeholders (contributors, pensioners, (contributors, pensioners, governments)governments)
•• TransparencyTransparency
3636
Financial sustainabilityFinancial sustainability
0
50
100
150
200
250
300
350
1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050Contributions Investment earnings Expenditures
Canada Pension Plan:Income vs expenditures
CAD
bill
ions
Source: Office of the Chief Actuary
3737
Financial sustainabilityFinancial sustainability
0
1
2
3
4
5
6
7
8
1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Old Age Security
Canada/Quebec Pension Plans
Source: Office of the Chief Actuary, Régie des Rentes du Québec
Public pensions as a percentage of Gross Domestic Product (GDP)
Perc
ent
of
GD
P
3838
Evolving incomes of seniorsEvolving incomes of seniors
3939
Evolving incomes of seniorsEvolving incomes of seniors
0%10%20%30%40%50%60%70%80%90%
100%
All Men Women
OtherEmploymentInvestmentsPrivate pensionsC/QPPOAS
26.219.3
34.3
20.821.2
20.3
30.323.4
36.3
Source: Statistics Canada
Sources of income (percentage), 2001
4040
Evolving incomes of seniorsEvolving incomes of seniors
0
5000
10000
15000
20000
25000
30000
35000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
All Men Women
Source: Statistics Canada
CAD
, co
nst
ant
2001
Average income
27,486
17,324
28,330
18,671+7.8%
+3.1%
4141
Evolving incomes of seniorsEvolving incomes of seniors
0102030405060708090
1991 1996 2001
OtherEmploymentInvestmentsPrivate pensionsC/QPPOAS
19.9 21.1 22.1
10.814.9 17.5
12.3
25.620.0
Sources of income (total amount)
Source: Statistics Canada
CAD
bill
ions,
const
ant
2001
4242
Evolving incomes of seniorsEvolving incomes of seniors
0%
20%
40%
60%
80%
100%
1991 1996 2001
OtherEmploymentInvestmentsPrivate pensionsC/QPPOAS
30.5 28.0 26.2
16.6 19.7 20.8
18.830.326.4
Source: Statistics Canada
Sources of income (percentage)
4343
ConclusionsConclusions
4444
ConclusionsConclusions
Overall,Overall,•• The Canadian pension system is The Canadian pension system is meeting its core objectives of meeting its core objectives of poverty avoidance and income poverty avoidance and income replacementreplacement
•• The system will continue to meet The system will continue to meet its objectives, and the incomes of its objectives, and the incomes of seniors will continue to increase in seniors will continue to increase in real (after inflation) termsreal (after inflation) terms
4545
ConclusionsConclusions
The Canadian pension system is The Canadian pension system is financially sustainable over the long financially sustainable over the long termtermHowever, problems remain (e.g. low However, problems remain (e.g. low income among some seniors, some income among some seniors, some disincentives to continued work) and disincentives to continued work) and require onrequire on--going policy attentiongoing policy attention
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