Canada’s Retirement Income System

Assignment 2:

Canada’s Retirement Income System: Economic Issues & Indicators

(brief) Summary of main points (20%):

• Compared to the United States and the OECD average, how well does Canada do in terms of i) mitigating low old-age poverty; and ii) providing adequate retirement income replacement?

• From public pension benefits alone, in Canada what are the hypothetical gross replacement rates for someone with career average earnings equivalent to 25%, 100%, and 175% of the average industrial wage? Approximately at which level of average career earnings as a percentage of the average industrial wage do gross replacement rates fall below 60%?[1] What does this imply about the functioning of Canada’s public pension system, and which subset of Canadians need to be wary of this?

• How has Defined Benefit pension plan participation changed since the mid-1980’s, and are these changes different across sector of employment and by sex? What types of economic risks are associated with the changing of DB participation?

• What are the main drivers of pension reform in Canada? What has been Canada’s main form of reform? How has Canada’s average retirement age evolved over the past two decades? How has Canada’s average age of CPP take-up changed since 2000?

• The Retirement Income System (20%):

• What are the three pillars of Canada’s RIS and what are their functions?
• What are the main objectives of Canada’s RIS? What are the indicators for measuring Canada’s success in meeting these objectives? Describe the indicators and compare them.
• According to OECD data, how does Canada compare to the United States and the OECD average in terms of rates of old-age poverty and retirement income replacement? How does Canada compare to the United States and the OECD average in terms of replacement for someone with career average earnings equal to 50%, 100% and 150% of the average national wage? Produce excel bar charts to visualize these comparisons.
• According to the most recent Statistics Canada data on absolute and relative poverty measures, how does the absolute poverty rate of Canada’s elderly compare to that of other age groups? How about for the measure of relative poverty? Do the measures differ by sex, and if so, what might explain that? Use Statistics Canada’s public-use data to line-plot the trends over the available reference period.
• Building from the above two bullet points: how well does Canada appear to meet it’s RIS objectives, and which subsets of Canadians need to be most wary when preparing for retirement?

• The Public Pension System (20%):

• How are Old Age Security and Guaranteed Income Supplement benefits determined and how are they financed?
• Are OAS & GIS subject to income tax? How do other sources of income effect OAS & GIS? Are there any exceptions/exemptions?
• According to the 2019 federal budget report, what proportion of all federal expenses constitute elderly benefits expenses?
• According to the Chief Actuary report, how are elderly transfer expenses projected to increase with population aging in the future?

• How are Canada Pension Plan benefits determined and how are they financed? How does Canada’s financing scheme compare to a strict Pay-As-You-Go scheme?
• What are the components of the CPP benefit formula and what does benefit formula do? Which components of the formula are subject to reform?

• How does OAS & GIS influence measures of elderly absolute & relative poverty (what are the implications of price- vs. wage-indexation)?
• From public pension benefits alone, in Canada what are the hypothetical gross replacement rates for someone with career average earnings equivalent to 25%, 100%, and 175% of the average industrial wage? How much does OAS & GIS alone replace for those with average career earnings amounting to 25% of the average industrial wage? Approximately at which level of average career earnings as a percentage of the average industrial wage do gross replacement rates fall below 60%? Make a line plot with average career earnings relative to the YMPE on the x-axis and the gross replacement rate on the y-axis; plot a separate series for replacement from OAS & GIS, CPP, and total public pension benefits. What does this imply about the functioning of Canada’s public pension system, and which subset of Canadians need to be wary of this?

• Workplace Pensions (20%):

• How has Registered Pension Plan coverage evolved in Canada since the mid-1980’s? Use Statistics Canada public-use data to plot the trend over the total available reference period.
• How has Defined Benefit pension plan participation changed since the mid-1980’s, and are these changes different across sector of employment and by sex? What types of economic risks are associated with the changing of DB participation? Use Statistics Canada’s public-use data to plot plan-mix trends by sector and by sex.
• Despite being perceived as “lower quality”, why is participation in a DC pension plan better than relying on self-directed private savings?

• Recent Policy Reform Options (20%):
• What are the main drivers for pension reform in Canada?

4.1) CPP Enhancement:

• What does CPP enhancement propose to do to the “Status-quo” CPP replacement rate and earnings cap?
• How is CPP enhancement proposed to rectify some of the issues related to Pillar 3?
• What are some issues with CPP enhancement? How does it interact with other aspects of the public pension system?

4.2) Eligibility-Age:

• What is Canada’s public pension eligibility-age policy and how does it compare with most other OECD and G20 nations?
• If Canada maintains its current eligibility-age policy, what will be the age-eligible share of the population in 2031? Assuming a PAYGO financing scheme and that benefits are fully wage-indexed at 0.25, over the same timeframe what will be the effect on contributions? Given Canada’s pension financing scheme, are the calculated contributions rates likely to be a lower- or upper-bound estimate on actual contribution rates?
  Under the same financing assumptions, how do the number of beneficiaries and the contribution rates change if the eligibility-age increases by two months each year between 2019 and 2031?[2] Plot the number of beneficiaries and contribution rates under the two scenarios from 2019 through 2031.
• Is an age-based eligibility criterion warranted?

4.3) Flexible retirement policy:

• What policies has Canada implemented to alleviate old-age work disincentives? According to Employment and Social Development Canada evaluations, are these policies effective?
• What policies has Canada implemented to encourage work while collecting a pension?
• How has Canada’s average retirement age evolved over the past two decades? Plot using OECD statistics[3] Canada’s average retirement age over the available reference period. How has Canada’s average age of CPP take-up evolved since the year 2000? Plot Canada’s average CPP take-up (for both sexes) from 2000 to the end of the available data period

[1] For this question, set the CPP Years Maximum Pensionable Earnings level at $58,700, the maximum annual OAS benefit at $7,362.36, and the maximum annual GIS benefit at $10,996.56.

[2] Hold fixed the labour force participation rate at it’s 2019 level for years 2020-2031.

[3] Average age of effective retirement statistics: https://www.oecd.org/els/emp/average-effective-age-of-retirement.htm