THE CANADIAN PENSION
SYSTEM AND ITS REFORM
P R E P AR E D B Y AL L AN M O S C O V I T C H
F O R T H E C O U N C I L O N AG I N G
O T T A W A , M AR C H 2 0 1 2
THE PENSION SYSTEM
• In retirement, people rely on a combination of
• Public pensions
• OAS and GIS Minimum Income Programs – Tax revenues
• C/QPP – Social Insurance – Premiums paid by employees and
employers
• Social assistance
• Registered Pension Plans
• Other private pensions
• Personal savings – including RRSPs, RRIFs, TFSA, Investments,
Insurance, housing
• Employment income
• Support from family members
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PUBLIC PENSIONS
• The Public Pension System
•
•
•
•
Old Age Security
Guaranteed Income Supplement
Canada and Quebec Pension Plans
Social assistance
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THE OLD AGE SECURITY (OAS)
$540.12 per month or
$6481.44 per year
Received by 4,764,820 Canadians in 2010-2011
Available to everyone who has lived in Canada for
40 years since the age of 18
• The OAS is indexed to inflation
• The OAS is taxable income
•
•
•
•
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OAS CLAW BACK
• The OAS is subject to a clawback at $69,562 for
2012
• For every dollar ($1.00) of income above the
threshold, the amount of the OAS pension reduces
by 15 cents
• All OAS is clawed back at $112,772 in 2012
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GROWTH IN OAS BENEFICIARIES
HTTP://WWW.SERVICECANADA.GC.CA/ENG/ISP/STATISTICS/CPPSTATBOOK/STATBOOK2011.SHTML#T3
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HOW MUCH ARE WE SPENDING ON THE OAS?
(IN BILLIONS)
HTTP://WWW.SERVICECANADA.GC.CA/ENG/ISP/STATISTICS/CPPSTATBOOK/STATBOOK2011.SHTML#T3
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PERSONS IN ELDERLY FAMILIES
LIM MEASURE AFTER TAX, 1977-2009
Geography: Canada
Low income line: Low income measure after tax
Statistics: Percentage of persons in low income
Economic family: Persons in elderly families
28
24
20
16
12
8
4
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
Date
1995
1997
Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual
8
1999
2001
2003
2005
2007
2009
% PERSONS IN ELDERLY FAMILIES
BELOW LICO, AFTER TAX, ANNUAL DOLLARS, 1992
BASE, 1977-2009
Geography: Canada
Low income line: Low income cut-offs after tax, 1992 base
Statistics: Percentage of persons in low income
Economic family: Persons in elderly families
20.0
17.5
15.0
12.5
10.0
7.5
5.0
2.5
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
Date
1995
1997
Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual
9
1999
2001
2003
2005
2007
2009
% ELDERLY FEMALES BELOW LIM
MEASURE AFTER TAX
Geography: Canada
Low income line: Low income measure after tax
Statistics: Percentage of persons in low income
Economic family: Elderly females
64
56
48
40
32
24
16
8
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
Date
1995
1997
Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual
10
1999
2001
2003
2005
2007
2009
% ELDERLY FEMALES
BELOW LICO, AFTER TAX, ANNUAL DOLLARS, 1992
BASE, 1977-2007
Geography: Canada
Low income line: Low income cut-offs after tax, 1992 base
Statistics: Percentage of persons in low income
Economic family: Elderly females
72
63
54
45
36
27
18
9
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
Date
1995
1997
Table: 804-3.ivt - Modified Table 202-0804 - Persons in low income, by economic family type, annual
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1999
2001
2003
2005
2007
2009
AFTER TAX POVERTY RATE FOR SENIORS,
1976-2007
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AFTER TAX POVERTY RATES BY AGE
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ARE WE DOING SOMETHING RIGHT?
• The data suggest that public policy is having a
strong impact leading to the reduction in poverty
rates for people over the age of 65
• The combination of the OAS, the GIS, the C/QPP
and the tax system have brought down the poverty
rates
• There is still more to be done, in bringing down the
rates of poverty for single elderly women.
• Increasing the age of eligibility for the OAS will not
improve the economic conditions of many people
who depend on it particularly those with low
incomes
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THE REFORM OF OAS
• It is the upward trend of numbers of beneficiaries as
the baby boomers retire, and
• The increasing expenditure on the OAS that have
been the subject of attention recently from
conservative policy analysts and Conservative
politicians
• An additional concern - seniors (people aged 65
and over) represented 8% of the population in 1971,
14% in 2011 and are likely to represent almost 25%
by 2036.
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PROJECTED PENSION COSTS TO 2035
• Historical and Projected Provincial/Territorial Health Expenditures and
CPP/OAS Expenditures (Including GIS and Administration Costs), as a Share of
GDP
•
Sources: For health care data – Office of the Parliamentary Budget Officer, Fiscal Sustainability Report, 18 February 2010, and
authors’ calculations; for CPP/OAS data – Office of the Superintendent of Financial Institutions, Actuarial Report on the
Canada Pension Plan, 2010, and Actuarial Report on the Old Age Security Program, 2008. Some Public Policy Implications of
an Aging Population Havi Echenberg, James Gauthier, André Léonard, Library of Parliament,
http://www.parl.gc.ca/Content/LOP/ResearchPublications/CurrentEmergingIssues-e.pdf
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REFORM POSSIBILITIES
• A major issue for the Conservatives is wanting to
make government smaller. The reduction in the GST
was intended to push in this direction.
• The recent expansion of government expenditures
was forced on them by a minority parliament.
• Doing nothing is an effective option since the OAS is
not broken – its helping to reduce senior poverty
• With increasing GDP, while expenditures on the OAS
increase, they will not increase substantially as a %
of government revenues unless governments
decide to reduce taxation
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TOTAL TAX REVENUES AS A PERCENTAGE OF GDP, 2003
OECD FACT BOOK 2006 - ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS
PUBLIC SOCIAL EXPENDITURE AS A PERCENTAGE OF GDP, 2001
OECD FACTBOOK 2006 - ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS
REFORM POSSIBILITIES
• The Conservatives have talked about the OAS as a
burden on the federal government. They have
floated the idea of increasing the age of eligibility
of the OAS from 65 to 67.
• Were this implemented it would have to be phased
in so that it does not affect anyone currently retired
or planning to retire in the next 10 years.
• But an increase in the age of eligibility will have the
effect of depriving low and moderate income
seniors of significant income for two years.
• What are the implications?
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REFORM POSSIBILITIES
• The result is likely to be some combination of:
• An increase in measured poverty among seniors
• More seniors in the labour force longer if they can which
means fewer jobs for people attempting to either enter or
move to better paid positions
• More emphasis on savings for those who can save and
avoid the impact especially through the government’s new
tax free savings plans
• Use of the TFSAs will means less income tax revenues
• Lower incomes is directly related to poorer health outcomes
which may cost more than the savings
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SOME OTHER CONSIDERATIONS
• Seniors pay taxes including on the OAS that they
receive.
• A very small percentage of seniors are subject to
the clawback indicating a need for public pensions
• In general Canada does not spend a high
percentage of GDP on social programs
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WHAT IS THE PURPOSE OF OAS
REFORM?
• Reduce OAS expenditures because the OAS is
unaffordable – not clear that it is unaffordable.
• Reduce government expenditures – this may be a
Conservative goal but is it the consensus of
Canadians?
• Require more people to depend on their own
resources instead of government – a Conservative
goal but for many people it is unrealistic – they do
not have the resources.
• Reduce the deficit and debt – could seek new
forms of taxation as the economy recovers23
THE BENEFITS OF THE OAS
• Helps keeps large numbers of the population out of
poverty (in combination with the GIS)
• Puts income in the hands of people who spend it
which keeps the economy moving.
• Sends a message to most Canadians that in
retirement there are still some forms of social
solidarity that almost everyone can benefit from
and depend on
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REFORM ALTERNATIVES
• Are there alternatives for governments
determined to reduce OAS expenditures?
• Hold or reduce the level at which the clawback
begins to an amount less than $69,562.
• Increase the clawback rate on a progressive basis
ie 15% to 20% at $79,000 to 25% at $89,000, and
then 30% on the rest so that it takes a little more
faster.
• Neither of these changes would have the same
impact on low and moderate income seniors as
an increase in the age of eligibility would
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REFORM ALTERNATIVES
• Monica Townson writing for the CCPA earlier this
year, points to the fact that income from a TFSA is
not counted in establishing eligibility for the GIS.
http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2012/02/OAS.
pdf
• This is likely to have the effect of increasing eligibility
for the GIS
• She is pointing to the way that the income tax has
been used by successive governments to provide
benefits especially to higher income earners
• It may be desirable to increase the eligibility for the
GIS to people with incomes just above the previous
limits
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REFORM ALTERNATIVES
• But another choice is to alter the range of tax
based benefits used to support private pensions.
• For example the net tax benefit (taxes lost) due to
the RRSP in 2010 was $12.125 billion per year, much
of which goes to individuals and households with
high incomes.
• The tax expenditure for 2010 for RPPs was $16.790
billion
• CPP premium deductibility is worth another $8.240
billion to employers and employees
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REFORM ALTERNATIVES
• Lastly, here’s an idea in the other direction.
• First establish a modest income security tax as a
percentage of gross income.
• Second, use the revenues to create a pension fund
to support continuing the OAS into the future.
• Third, as the fund expands, with rising incomes, use
the additional funds to increase the OAS.
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THANK YOU FOR LISTENING AND
PARTICIPATING
The End
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