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Reforming Canada's Pension System

Pension Reform is in the Spotlight in Canada

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Dateline: 01/31/12

Prime Minister Stephen Harper opened up the discussion on reforming Canada's pension system in an oblique way and place. In a speech to the World Economic Forum in Davos, Switzerland on January 26 he referred to "major transformations to position Canada for growth over the next generation," and included Canada's retirement income system. Back home in Ottawa as the House of Commons got down to work after a six-week break, the Prime Minister was met with a lot of indignation and heavy rhetoric, not to mention some persistent demands for information. For now the assurances continue to be vague, and probably won't get more specific until the Budget is released in late February or early March.

Here's where things stand with Canada's public pensions.

Old Age Security (OAS) and Guaranteed Income Supplement (GIS)

The Old Age Security Pension is the basic "safety net" of the Canadian pension system. It provides a basic minimum for Canadian seniors or permanent residents who have lived in Canada for at least 10 years after the age of 18 and who apply for it. The qualification age is 65. Benefits are gradually clawed back through taxes as income rises.

The Guaranteed income Supplement is an additional monthly payment for those seniors with less than $16,328 in annual income.

The OAS and GIS are both adjusted for inflation. They are funded entirely from government revenues.

A media Info-alert from the Prime Minister's office says "the OAS is funded primarily through taxes on working people and is unsustainable on its current course."

Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP)

The CPP, and QPP in Quebec, are defined benefit pension plans which provide a basic level of earnings replacement for Canadian workers. The Department of Finance says that 16.5 million workers are currently contributing to the CPP/QPP. It is considered sound and unlikely to be subject to major changes, although it may be tweaked a bit.

Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs)

These are private savings opportunities with tax assistance to encourage more saving for retirement.

RRSPs are individual savings plans, and RPPs are sponsored by employers on a voluntary basis.

The federal government says that Canadians, especially modest and middle-income earners, are not taking enough advantage of these savings opportunities. Participation in RRSPs decreased from 45 percent of the labour force in 1997 to 39 percent in 2008. The percentage of working Canadians with RPPs went from 41 percent in 1991 down to 34 percent in 2007.

The Department of Finance estimates the tax assistance provided for these plans is about $20 billion a year in forgone revenue for the federal government, and about $10 billion in forgone revenue for the provinces.

Pooled Registered Pension Plans (PRPPs)

These plans don't actually exist yet, but legislation to implement the federal portion of the PRPP framework to establish them is currently being pushed through second reading in the House of Commons. Provinces will also need to pass enabling legislation.

PRPPs are defined contribution pension plans, but not defined benefit plans. They are designed for self-employed workers or employees not covered by a pension plan. Employers would have to enrol all employees, but individuals could opt out.

The government considers PRPPs to be a way to fill a gap by giving small-businesses and their employees access to a large, low-cost pension plan that will be professionally administered.

MP Pensions

A January 2012 report on Canadian MP pensions from the Canadian Taxpayers Federation outlines just how good a deal members of parliament have, and urges that lawmakers bring their own pensions in line. A recent backgrounder report by the C.D. Howe Institute Fixing MP Pensions says that while the MP pension plan gives benefits much greater than other Canadians could get, virtually no assets have been set aside to pay those benefits.

The Conservatives seem a little confused on how to deal with the issue.

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