the canadian pension system - hitotsubashi university · 2005-09-02 · of the canada pension plan...

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


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


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


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


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


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


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


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


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


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%


Annual

inco

me,

CAD

, 2

003

Average income:Seniors / Non-seniors

91% 89%

2222


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


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


2626


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


Yea

rs

2727

Financial sustainabilityFinancial sustainability

2828


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


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


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


+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


--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


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


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


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


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


3737


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


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


Sources of income (percentage), 2001

4040


0

5000

10000

15000

20000

25000

30000

35000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

All Men Women


CAD

, co

nst

ant

2001

Average income

27,486

17,324

28,330

18,671+7.8%

+3.1%

4141


0102030405060708090

1991 1996 2001


19.9 21.1 22.1

10.814.9 17.5

12.3

25.620.0

Sources of income (total amount)


CAD

bill

ions,

const

ant

2001

4242


0%

20%

40%

60%

80%

100%

1991 1996 2001


30.5 28.0 26.2

16.6 19.7 20.8

18.830.326.4


Sources of income (percentage)

4343

ConclusionsConclusions

4444


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


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

the canadian pension system - hitotsubashi university · 2005-09-02 · of the canada pension plan...

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