Executive Summary – Canada’s Retirement Income System

(Disponible en français : Résumé – Le système de revenu de retraite du Canada)

The purpose of Canada’s retirement income system is twofold: to alleviate poverty among seniors and to help seniors who are better off to avoid significant declines in living standards when they retire. This Background Paper outlines the different components of the system, who they target, how much they cost and how they are financed. While there is a general consensus that the retirement income system is a policy success story, a broader discussion of how well the system is meeting its objectives today and what might need to be reformed if the system is to continue to function well into future will be left for another day.

To understand how this collection of programs and policy measures work to support seniors to attain and maintain a decent standard of living requires viewing them as a system. In turn, it is helpful to think of this retirement income system as being composed of three distinct pillars.

The first pillar provides benefits based on age and years of residence in Canada. It includes the Old Age Security (Old Age Security) pension, the Guaranteed Income Supplement (GIS), the Allowance and the Age Credit. Often referred to as the foundation of the system, the first pillar uses a mix of universal and means‑tested programs to create a minimum level of income. This ensures that seniors can afford the necessities of life: food, shelter, heating and clothing. The first pillar is financed primarily through general tax revenue.

The second pillar consists of mandatory earnings‑related programs: the Canada Pension Plan (CPP) and, in Quebec, the Quebec Pension Plan (QPP). These public pensions are funded primarily through mandatory contributions by employers, employees and the self‑employed. As benefits are based upon age and the amount contributed over a person’s working career, the second pillar recognizes and supports workers who have spent decades in the labour force.

Third‑pillar initiatives are voluntary for employers and/or individuals. They include workplace registered pension plans (RPPs) and private savings (Registered Retirement Savings Plans [RRSPs] and Tax‑Free Savings Accounts [TFSAs]). In the third pillar, the federal government incentivizes the working age population to put money aside for retirement through preferential tax treatment. Generally, the third pillar is used most by higher earning Canadians.

Taking the three pillars together, the retirement income system is the federal government’s most expensive undertaking. In 2017, OAS/GIS was the single largest budget expenditure, at around $50 billion. Retirement benefits from CPP and QPP totalled over $42 billion. An additional $49 billion of tax expenditures was used to encourage the use of workplace RPPs and private savings. Benefiting millions of Canadian seniors and their families, our retirement income system will continue to grow in significance as Canada’s population ages.

The mixed funding model of the three pillars and the measures contained within them has been a source of strength, allowing the system to be both effective and resilient over the years. In the future, it is likely that issues related to the equity and transparency of tax expenditures that support the third pillar (workplace RPPs and private savings) will require more attention. In addition, as the proportion of Canadians with a workplace pension declines, governments will need to take a closer look to ensure retirement income adequacy for middle income earners.

Read the full text of the Background Paper: Canada’s Retirement Income System

Authors: Matthew Blackshaw and Elizabeth Cahill, Library of Parliament