est consultant à Ottawa, spécialiste des questions de retraite, de vieillissement et du marché du travail.


Canada's Retirement Income System : Current and Future Strengths and Weaknesses1

The latter part of the 20th century was a period of rapid improvement in the incomes of older Canadians. But the early part of the 21st century has been accompanied by considerable concern about the privately administered parts of Canada’s retirement income system (RIS). National and provincial ministers of finance are now considering options for the reform of this part of Canada’s RIS.

Structure of Canada’s Retirement Income System

Like most countries in the Organization for Economic Cooperation and Development (OECD), Canada’s RIS is comprised of three pillars:

The first pillar is dominated by two programs operated by the Government of Canada– a flat rate benefit program (Old Age Security or OAS) that is available to Canadians at age 65 who meet residence requirements (the high income elderly pay a special surtax on their benefits), and an income tested benefit for the low income elderly (Guaranteed Income Supplement or GIS). These programs are financed from general tax revenue on a pay-as-you-go basis.

The second pillar consists of two publicly administered programs– the Canada Pension Plan (CPP), which operates in all provinces except Quebec, and the Quebec Pension Plan (QPP), which operates only in Quebec. Together, these programs (referred to as the C/QPP) are designed to replace 25 per cent of a person’s pre-retirement earnings up to the average wage and salary (AWS)at age 65. Benefits can be initiated before and after age 65 on an adjusted basis.

There is complete portability between the CPP and QPP. Participation is compulsory for wage earners and the self-employed and contributions are based on earnings up to the AWS. The plans currently have reserve funds that amount to roughly four years’ benefits payments. Reserves are projected to grow to more than six years’ of payments in the future.

The third pillar is made up of privately administered workplace pension plans and individual retirement savings accounts. The third pillar receives tax support and workplace pensions are regulated in the public interest. However, a declining portion of employed workers participate in a workplace pension plan. Participation in workplace pension plans tends to increase with: level of earnings, union membership, education, and working for a large public or private employer. By comparison, the use of individual retirement savings accounts depends largely on income level. By its nature, the third pillar is heterogeneous.

The first pillar provides a minimum income guarantee for older Canadians that falls just short of the poverty line. All three pillars contribute to the ability of Canadians to maintain their standard of living in retirement. However, compared to other OECD countries, the first two pillars in Canada make a limited contribution to replacing pre-retirement earnings and make their strongest contribution at low levels of earnings.

Table 1 presents the OECD’s estimate of benefits provided by pillars 1 and 2 in Canada and France expressed as percentages of different levels of wages and salaries.

Table 1

Publicly Administered Pension Benefits as a Percentage of Different Multiples of Average Wages and Salaries (AWS)

0.5 x AWS

1.0 x AWS

1.5 x AWS









Source: OECD, Pensions at a Glance, 2009

Canadians with moderate to high earnings have to rely quite heavily on income from the third pillar in order to maintain their standard of living in retirement.

A Period of Progress

The latter part of the twentieth century was a period of remarkable progress in the incomes of older Canadians Elderly couples experienced average real income growth of 55 per cent over the period from 1976 to 2006 compared to 79 per cent growth for the single elderly. Incomes of the elderly tended to become more equal over the period, although there has been some reversal of that trend recently.

The elderly poverty rate fell from 35 per cent to 3 per cent by the mid 1990s. It has increased slightly since then but remains one of the lowest in the OECD. Also, recent studies have shown that most of the population is making the transition from work to retirement without a material loss in their standard of living, although there is a significant minority for whom this is not true. Moreover, the income gap between the elderly and non-elderly has closed over time.

Growth in real incomes of the elderly came primarily from the C/QPP and the third pillar. However, growth in real C/QPP income stopped in the mid 1990s. It has its biggest impact on the lower portion of the elderly income distribution. Third pillar real income has continued to grow throughout the period. It has its biggest impact in the upper middle part of the distribution. Income from the first pillar has remained stable while income from investments and employment has decreased. In the mid 2000s, employment income began to increase slightly.

The strong income growth just noted was not a straightforward demonstration of the intrinsic strength of the RIS. It reflected the interaction of the RIS with a particular set of economic circumstances: high rates of return on financial assets, slow wage growth, and low inflation. The same RIS would not produce the same outcomes under different circumstances. Moreover, the third pillar has faced a number of problems.

Third Pillar Problem 1: Regulatory and Legal Issues

The responsibility for regulating workplace pensions is shared between the national and provincial governments, resulting in ten sets of regulatory laws in Canada (one province has no regulatory law). The laws generally deal with a common set of issues: selected members’ benefit rights (e.g. vesting rules and survivor benefits); funding requirements for defined benefit (DB) pension plans; and plan member rights (e.g. right to information).

The current laws were established in the late 1980s and early 1990s. A number of longstanding and unresolved problems have developed that make the management of workplace pensions unnecessarily difficult:

  • The laws often don’t apply clearly to a growing number of plans that combine elements of DB and defined contribution (DC).
  • Differences among jurisdictions in the detail of regulatory laws have grown(even where there is no obvious difference in policy).
  • There are unresolved legal issues especially with respect to the allowable use of DB pension surplus.

Several provinces have established inquiries over the past few years to address these issues. If the recommendations of these inquiries are adopted, they should make workplace pensions easier to manage but they will not solve the problems noted below.

Third Pillar Problem 2: Changing Financial Circumstances

In the late 1980s workplace DB pension plans were required to meet financing requirements that are more market sensitive than previous requirements. The new requirements were hardly noticed for the first decade after their adoption: the stock market was booming and interest rates were relatively high. However, interest rate declines in the new millennium pushed up liabilities, and two stock market collapses (2000 – 2002 and 2008) have damaged the asset side of the balance sheets. Employer contributions to DB plans that were stable in the aggregate at about $10 billion per year in the 1990s rose to $18 billion in 2004 and $24 billion in 2008.

Employer sponsors of DB pans have successfully pleaded for relief from the funding rules and their requests are often supported by employee groups. But the relaxation of funding rules does heighten the possibility that a plan will be terminated through bankruptcy with insufficient assets to meet its obligations. This danger has materialized even with very large employers.

Since the early 1990s, a number of public employee pension plans have moved from being “pure DB” plans to plans that involve both joint governance and joint cost sharing (i.e. formally sharing the burden of special amortization payments). Recent financial difficulties have forced some of these plans to extend plan member risk sharing to benefits and they now provide post retirement indexation based on the financial status of the plan.

Third Pillar Problem 3: Declining Coverage and a Shift from DB to DC

The portion of the employed workforce that participates in workplace pensions has declined steadily since the late 1970s from about 46 per cent to 38 per cent in 2008. Over the same period there has also been a shift in workplace pension coverage from DB to DC. In 1977, 94 per cent of workplace pension plan members were in DB plans compared to the current rate of 77 per cent. These trends are evident in both the public and private sectors but are much stronger in the latter.

For several reasons, the decline in participation has had no effect on total retirement income or on income from the third pillar so far:

  • Through the mid 1990s, increased use of individual retirement savings plans was offsetting declining participation in workplace pension. This offsetting influence has not been present since that time.
  • As the portion of the workforce that participates in workplace pensions has declined, the portion of the adult population in paid employment has gone up. Thus the portion of the adult population in workplace pensions has been stable.
  • Participation at the level of the household has been more stable than individual participation.

The last two points reflect the growing participation of women in the paid labour force. But there is little scope for this development to offset declining coverage in the future.

The decline in participation causes concern that in the future many elderly will not be able to maintain their standard of living in retirement. The shift to DC causes concern that future retirement incomes will be less predictable and secure. (The distinction between DB and DC is usually thought of as a bimodal choice. But the emergence of hybrid plans has made it evident that it is more appropriate think in terms of a spectrum of design choice).

Looking Ahead

Research suggests Canada’s RIS will continue to serve most of the elderly quite well in a stable economic and institutional environment. However, there will be pockets of poverty and a significant minority of middle and upper earners will likely face a material decline in their standard of living. There is an additional concern that third pillar institutions may not be optimal in terms of their scale, governance, and alignment of interests between retirement savers and delivery agents.

But the environment is not stable. Participation in workplace pensions is declining and there is a shift to DC plans. Moreover, two developments in the demographic and economic sphere are putting upward pressure on pension contribution and retirement savings rates: the period of retirement is growing in relation to the period of pension contribution/retirement saving, and the gap between returns on financial assets and wage growth is shrinking. Moreover, workplace DB plans are becoming more mature and, therefore, more volatile financially.

At the time of writing, Canada’s national and provincial governments are in discussion on reforms to address the issues noted in this article. The discussions are on two separate tracks:

  1. regulatory and legal issues; and,

  2. the overall design of Canada’s RIS to address declining participation in workplace pensions.

It is impossible to guess at the outcome of these deliberations at this point in time. A wide range of options has been proposed by stakeholders. Because the Canadian population is ageing quite rapidly, it is increasingly important to strike the right balance between the welfare of a growing population of retirees, and the willingness and ability of a relatively smaller working population to forego income in support of the RIS.


  1. Documentation for all references made in this article is available in Baldwin, 2009.
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