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Canadian Pension Reform: the Long View

Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them.  For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.

However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.

To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010.  They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.

They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s.  This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent.  But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor.  [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.]

Another finding from their analysis was that more of the benefits of reform have flowed to retirees who had low and moderate earnings.

“The expansion of Canada’s public pension system over the last 50 years has coincided with a large improvement in elderly living standards,” the researchers conclude.

And Canada has enacted many benefit enhancements since the early 1960s, when the only federal pension was the Old Age Security program funded out of general revenues to provide a stipend to virtually all 70 year olds.  Starting in 1965, the government began building a multi-tiered system with the phase-in of the Canadian Pension Plan (CPP), a social insurance program that, like Social Security, provides a benefit funded by contributions based on workers’ earnings.

In 1967, Canada added the Guaranteed Income Supplement (GIS), a means-tested benefit for low-income retirees funded out of general revenues.  In the late 1960s, the eligibility age for an Old Age Security pension was reduced from 70 to 65. In the 1970s, government pensions were indexed to inflation.  The GIS was expanded several times between 1971 and 2006.  By the 1980s, the CPP had introduced early benefits for 60 to 64 year olds.

These reforms have particularly helped Canada’s lowest-paid workers.  Each dollar increase in government pensions has increased the retirement incomes of families at the 10th percentile of earnings by 72 cents, the researchers found.  Middle earners – those at the 50th percentile – saw a 43-cent increase.  People at the 90th percentile also benefited, though somewhat less: their retirement incomes rose 41 cents.  [Elderly expenditures also increased, though the results were more mixed.]

A broader implication of this study is that public pension plans can have a large, positive impact on the well-being of retirees.

Full disclosure:  The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog.  The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.

One Response to Canadian Pension Reform: the Long View

  1. Dave G. says:

    To what degree is the Canadian system unfunded? Appears payments come from their general funds plus some from contributions.

    Given the rich natural resources of Canada and relatively small population, imagine if instead they created a sovereign wealth fund to back social retirement benefits? They would have real assets behind the promise to pay.

    I understand FDR was approached in the 30’s by the presidents of Prudential, New York Life and Metropolitan Life, who proposed Soc. Sec. be put on a legal reserve basis, just like insured plans are required to be. He turned it down as too expensive. If too expensive when the ratio of workers to beneficiaries was 159-to-1 in 1940, what does that say about the system now at a mere 2.9 to 1
    as of 2010?

    A Canadian OAS report in 2012 estimated their ratio of workers to retirees at 4.4 to 1, headed to 2.2 to one by 2050.

    How is any of this sustainable, without major changes and what politician wants to touch it?

    See: http://www.ssa.gov/history/ratios.html

    Also: http://www.cbc.ca/news/business/taxes/is-old-age-security-truly-unsustainable-1.1145910