Canada’s Retirement Income System: Issues and Options

1. Canada’s Retirement Income System:Issues and Options Ontario’s Public Consultations on Canada’s Retirement Income System Ottawa, Ontario May 6, 2010 Prepared by: Ontario Ministry of Finance Printed On: 2014-08-31 11:57 PM

2. Canada’s Retirement Income System: “The Three Pillars Approach” • Canada’s pension system consists of three pillars: • Universal government benefits for seniors (PILLAR 1) • Canada Pension Plan (PILLAR 2) • Employment Pension Plans and Individual Retirement Savings (PILLAR 3)

3. Canada’s Retirement Income System among OECD Countries “Old-age income safety-nets in Canada are amongst the highest in the OECD, helping Canada have one of the lowest poverty levels relative to average earnings.” Figure 2.5, OECD Pensions at a Glance, 2009

4. PILLAR 1: Universal Government Benefits • Federal seniors benefits include: • Old Age Security (OAS) • Guaranteed Income Supplement (GIS) • Spouses Allowance (SPA) Ontario (and other provinces and territories) supplement federal benefits to low-income seniors

5. PILLAR 2: Canada Pension Plan • Federal government and Provinces are joint stewards of the CPP • Provides retirement, survivor, and disability benefits • Universal coverage of all workers in all industries • Employees and employers make equal contributions (4.95% each – 9.9% combined) on earnings up to annual maximum of $47,200 (2010) • Defined Benefit – up to 25% of the average wage • Fully portable • Inflation-indexed to CPI • Actuarially sound for the next 75 years • CPPIB invests assets of $123.9 billion

7. PILLAR 3: Employment Pension Plans (EPPs/RPPs) & Individual Retirement Savings 1. Employment Pension Plans (EPPs/RPPs) • Voluntary plans sponsored by an employer or union • Defined Benefit (DB), Defined Contribution (DC) or Hybrid • Maximum DB pension accrual is $2,494 per year of service (2010) • Subject to federal or provincial pension benefits standards legislation • Contributions are tax deductible and investment income is tax deferred • Benefits are taxable • Traditional DB coverage has been gradually declining

8. Ontario Employees Covered by DB Pensions Per Cent Sources: Statistics Canada, Pension Plans in Canada and Labour Force Survey.

9. PILLAR 3: EPPs/RPPs and Individual Retirement Savings 2. Registered Retirement Savings Plans (RRSPs) / Registered Retirement Income Funds (RRIFs) • Contributions to RRSPs are tax deductible • RRSP withdrawals and RRIF income payments are taxable • In 2006, federal RRSP tax expenditure was estimated at $10 billion (plus Provincial tax expenditures)

10. PILLAR 3: EPPs/RPPs and Individual Retirement Savings 3. Other Savings • Total savings rates in Canada are very low by historical standards • Average family savings of $1,332 per year • Savings are accumulated and then dispensed over a person’s life cycle • Savings can be held in non-pension financial assets (including the new TFSA) and non-financial assets

11. Canada’s Retirement Income System: “The Three Pillars Approach”

12. Canadian Retirement Income System: Strengths Strengths • RIS has worked well for many Canadians • Dramatic declines in senior poverty since 1970s • Diversity of the RIS is a strength

13. Canadian Retirement Income System: Challenges Challenges • Market downturn in 2008 and low long-term interest rates • Declining coverage in traditional pension plans • Pillar 2 (CPP/QPP) provides lower benefits than in most other developed countries • Questions about the ability of the existing system to deliver for tomorrow’s seniors • Research suggests that 1/4 to 1/3 of Canadians may not be savings enough for their future retirement.

14. Canadian Retirement Income System:Defining the Challenge • Ontario research identifies the challenge for tomorrow’s seniors: “The status quo is an option. However, it is an option that may leave a significant minority of people with moderate to high earnings facing a decline in their standard of living in retirement, and force many people to rely on sub-optimal pension and retirement savings institutions.” - Bob Baldwin “There is… some evidence that not all working Canadians are saving enough… Further study is needed to determine the degree of saving inadequacy. - Jack Mintz

15. Canadian Retirement Income System: Government Response Expert Commission on Pensions • Review funding of DB pension plans and related matters • Bill 236, Pension Benefits Amendment Act, 2010 • First major pension reform in Ontario in over 20 years • Premier McGuinty calls for National Pension Summit • FPTWorking Group on Retirement Income Adequacy • Ontario research by Bob Baldwin • Federal research directed by Jack Mintz

16. Canadian Retirement Income System:Key Options • Major stakeholder proposals for reform: • Expansion of public pensions (CPP) • Supplementary DC pension plans • Pension Innovation • Reforms to Tax Assistance

17. Key Questions for Discussion • Why do we need to strengthen Canada’s retirement income system? • In your view what research or evidence demonstrates that people are not saving enough for retirement? • How would you define “enough”, and how much weight should be placed on personal choice? • What are some of the possible options or combination of options that the government should consider in strengthening Canada’s retirement income system for tomorrow’s seniors? • How would your preferred options or proposal be implemented? • How would your proposal work? • What do you think it might cost? • How would costs be allocated among employees, employers, etc.? • Would it be voluntary (e.g. opt-out) or mandatory? • How might other stakeholders be affected?