The Canadian retirement income system scored 70.6 on the 2022 Mercer CFA Institute Global Pension Index and a B grade in overall index value after evaluating the retirement income system’s adequacy, sustainability, and integrity. Canada’s retirement income system comprises a government social security program at the national level, voluntary Employment Pension Plans at the occupational level, and private savings opportunities at the individual level.
National Level
The Canadian national pensions consist of two old-age schemes, the Old Age Security (OAS) and the Canada Pension Plan (CPP).
The Old Age Security (OAS) program is the Government of Canada’s largest pension program, which is administered by the federal government and is usually supplemented by local programs in most of Canada’s provinces and territories. It provides basic income to individuals 65 years and older, and is a pay-as-you-go system funded by general government revenues. OAS is a residence-based, income-tested, and taxable benefit. If the individual’s net income exceeds the threshold amount set for the year (CAD $79,054 for income year 2020 rising to $79,845 in income year 2021), the entire or part of the OAS pension is reduced as a monthly recovery tax. In addition to the OAS pension, there are three types of supplementary OAS benefits: Guaranteed Income Supplement (GIS) (for low-income individuals), Allowance, and Allowance for the Survivor. The payments of these benefits are based on individual’s marital status and level of income, and are non-taxable income.
The Canada Pension Plan (CPP) is a mandatory defined benefit plan for employees over the age of 18 who work in Canada (outside Quebec) and earn more than a minimum amount ($3,500 per year) to contribute throughout their lifetimes. Eligible employees can apply for and receive a full CPP retirement pension at age 65, as early as age 60 with a reduction, or as late as age 70 with an increase in benefits. The amount employees contribute is based on their employment income, which is affected by the CPP enhancement which started in 2019. Employees make contributions only on their annual earnings between minimum and maximum amounts. The maximum amount in the CPP is set each January ($61,600 for 2021), based on increases to the average wage in Canada. The contribution rate on these pensionable earnings is 10.9% and is split equally between employee and employer. Self-employed workers pay the full 10.9%, with contributions based on net business income (after expenses). The maximum contribution to the base CPP for employers and employees in 2021 is $3,166.45. The maximum contribution for the self-employed is $6,332.90.
The province of Quebec has a separate Quebec Pension Plan for its residents that is very similar to the CPP. The base plan is funded by contributions made by individuals who work in Québec and their employers. In 2021, the contribution rate for the Québec Pension Plan is 10.80%. That rate is split equally between the employer and the employee, and applies to earnings between the $3,500 general exemption and $61,600, which is the maximum amount on which employees can contribute in 2021. The additional plan is also funded by contributions made by individuals who work in Québec and their employers. In 2020, the contribution rate for this additional plan is 1%. That rate is split equally between the employer and employee.
On March 2, 2017, Canada’s governor general signed an order in council to bring the Canada Pension Plan enhancements into force. Ontario Province, which had separately passed the Ontario Retirement Pension Plan Act 2016 on June 2, 2016, joined the other provinces instead in implementing this expanded plan, which Canada’s provincial governments have been working on since June 2016.
Beginning on January 1, 2019, the enhancements started raising the contribution rate for employers and employees to 5.95% over a seven-year phase-in period. The enhanced CPP will also increase the maximum CPP retirement benefit by about 50 percent. It will increase the share of annual earnings received during retirement from a quarter to a third of an individual’s income. Workers will have to make approximately 40 years of contributions to accumulate fully the enhanced benefit.
Occupational Level
The Registered Pension Plan (RPP) is a form of a trust that provides pension benefits for an employee of a company upon retirement. These plans are voluntarily sponsored by employers and may be defined benefit, defined contribution, or a hybrid. Employers are the primary contributors in these plans, but employees often also contribute. RPPs are tax-deductible with investments being tax-deferred. They are also subject to annual contribution limits. RPP consists of two types: Single Employer Registered Pension Plans (SEPPs) and Multi-Employer Registered Pension Plans (MEPP). SEPPs are administered by plan sponsors. Employers are mandated to make contributions to the plan, but customarily decide on the amount of contribution. With MEPPs, two or more autonomous employers contribute to the same pension fund.
For defined benefit pension plans (DBPPs), the pension amount is usually based on an employee’s average highest earnings and the number of years of working. Both employee and employer contribute to the plan, and the funds are invested in a pension fund. The employer manages the investment and bears all the investment risk.
For the defined contribution pension plan (DCPP), the employee is required to contribute a certain percentage of their salary and the employer matches all or part of this contribution. Employee can tailor the investments in their personal pension accounts to fit their own investment goals and risk profiles. Employees who prefer to receive scheduled payments instead of lump-sum amount can transfer the funds from DCPP to other registered plans, including a Locked-in Retirement Income Fund (LRIF), Life Income Fund (LIF), or Life Annuity. The number of employees participating in an employer-sponsored pension plan has declined in recent years: Only 1 of every 3 Canadian workers has a workplace pension.
Individual Level
Private savings opportunities are available through employers or financial firms with different taxation characteristics.
Registered Retirement Savings Plans (RRSP) are voluntary, individual-defined contribution plans. Employer contributions are entirely voluntary. RRSPs are tax-deductible with investments being tax-deferred. They are also subject to annual contribution limits. The contribution limit to an RRSP account is 18% of the previous year’s earned income, up to a maximum of $27,830 in 2021. The government allows individuals to withdraw funds tax-free from their RRSP if they use the funds on buying or building a home (up to $35,000) or paying for education (up to $20,000). There are four types of RRSPs: Individual, Spousal, Group, and Pooled.
Pooled Registered Pension Plans (PRPP) are available to those who are self-employed and employees at small-sized companies who don’t have access to employer-sponsored programs. Members can benefit from cheaper administration costs and ease of portability for job-switching. However, a federal territory or province must pass enabling legislation to make this option available. Quebec has a version called the Voluntary Retirement Savings Plan.
A Tax-Free Savings Account is a more-flexible plan that allows Canadian residents who are 18 years or order to invest up to $6,000 annually tax-free in 2021. Members can withdraw money from their accounts at any time, for any reason, tax-free, and without penalty. It could be used for retirement income, as well as other investment income.
Summary Sources
Cross, Philip. “The Reality of Retirement Income in Canada.” Fraser Institute. April 2014. Accessed 02/02/2021.
Government of Canada. “Canada Pension Plan (CPP).” Updated November 4, 2020. Accessed 02/02/2021.
Government of Canada. “Old Age Security pension recovery tax.” Updated December 31, 2020. Accessed 02/02/2021.
Government of Canada. “Public pensions.” Updated February 04, 2020. Accessed 02/02/2021.
Kagan, Julia. “Registered Pension Plan (RPP).” Investopedia. Updated November 11, 2020. Accessed 02/02/2021.
OECD. “Pensions at a Glance 2019.” November 27, 2019. Accessed 02/02/2021.
Retraite Québec. “The Québec Pension Plan.” Accessed 02/02/2021.
“RRSPs: Know Your Limits.” Sun Life Global Investments. May 04, 2021. Accessed 07/08/2021.
Savvy New Canadians and Dollar Financials, “A Complete Guide to Canada’s Retirement Income System.” Accessed 02/02/2021.
Current Issues
Under the 2021 Budget (tabled on April 19, 2021), the Government of Canada included a variety of measures to strengthen its retirement plans and ensure financial security after the COVID-19 pandemic. These measures include making it easier to fix contribution errors in defined contribution (DC) pension plans, expanding retirement savings coverage for vulnerable workers, and increasing OAS benefits for Canadians 75 and over.
In order to expand coverage to vulnerable working populations, the Budget includes a proposal to fund $27.6 million over three years for my65+, a Group Tax-Free Savings Account offered by the Service Employees International Union (SEIU) Healthcare for SEIU employees and their families in order to incentivize worker participation in retirement savings plans. The goal will be to work with other unions and trade organizations to further support workers
To increase benefits for Canadians aged 75+, the government will grant a one-time payment of $500 in August 2021 to OAS pensioners (75 or over in June 2022) and increase OAS payments by 10% as of July 2022 by amending the Old Age Security Act.
Other measures include modernizing existing systems to allow for electronic return of certain information returns, expanding the scope of unclaimed asset regime to increase the available information needed to connect Canadians with their unclaimed assets, and revising the framework for Negotiated Contribution Pension Plans (NCPP) to enhance benefit sustainability, governance, and transparency.
Summary Source
DeBortoli, Karen and Tom Mudrinic. “2021 Federal Budget Outlines Path to Recovery.” Buck. April 21, 2021. Accessed 07/08/2021.
Federal Budget 2021. “Notice of Ways and Means Motion to amend the Income Tax Act and Other Related Legislation.” Department of Finance Canada. April 19, 2021. Accessed 07/08/2021.
Pension, Benefits & Executive Compensation Group. “2021 Federal Budget: Selected Pensions, Benefits and Executive Compensation Measures.” Blakes. April 22, 2021. Accessed 07/08/2021
Current Issues
To fill in the gap in COVID-19 relief support, the Government of Canada introduced An Act to amend the Old Age Security Act (Guaranteed Income Supplement). The Act makes sure that COVID-19 relief funding is not withdrawn/ recipients of welfare benefits don’t experience a decrease in payments because of their increase in income caused by various benefits.
Moreover, the Government announced in their 2021 Economic and Fiscal Update that it is allocating over C$700 million for one-time payments to eligible seniors who received benefits in 2020, and whose benefits payments were negatively affected due to their rise in income. This one-time payment is scheduled to be distributed in April 2022.
This Act amends the Old Age Security Act to make sure that this issue does not re-occur.
Summary Source
Government of Canada. “An Act to amend the Old Age Security Act (Guaranteed Income Supplement).” Parliament of Canada. February 8, 2022. Accessed 03/23/2022.
Government of Canada. “Government of Canada introduces legislation to support low-income seniors who received pandemic benefits.” Employment and Social Development Canada. February 8, 2022. Accessed 03/23/2022.
Yahoo!Finance. “Legislation to support low-income seniors who received pandemic benefits receives royal assent.” Canada NewsWire. March 2, 2022. Accessed 03/23/2022.
Last Updated 3/23/22
Source: Georgetown University’s Center for Retirement Initiatives