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.
Canada's retirement income system is often described as having three pillars. The first pillar provides benefits based on age and years of residence in Canada. It includes the Old Age Security (OAS) pension, the Guaranteed Income Supplement (GIS), the Allowance and the Age Credit.1 This first pillar is funded largely through general tax revenues and is often understood to be the foundation of the retirement income system.
The second pillar consists of mandatory earnings‑related programs: the Canada Pension Plan (CPP) and, in Quebec, the Quebec Pension Plan (QPP). The CPP and QPP are public pensions, funded by mandatory contributions from workers and employers, as well as income from investments made with these contributions. While general tax revenue does not support these pensions, employers and workers are able to deduct contributions from their taxable income.2
The third pillar is composed of workplace registered pension plans (RPPs)3 and private savings (Registered Retirement Savings Plans [RRSPs] and Tax‑Free Savings Accounts [TFSAs]). Third‑pillar programs are voluntary to employers and/or individuals but they are supported and incentivized by the government through preferential tax treatment, which includes tax exemptions and tax credits.
Table 1 describes the three pillars of the retirement income system. The key elements of these pillars are discussed in greater detail in later sections of this Background Paper.
| What Is in This Pillar? | Who Gets It? | How Does It Work? | |
|---|---|---|---|
| Pillar One |
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| Pillar Two |
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| Pillar Three |
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Sources: Table prepared by the authors using information obtained from Department of Finance Canada, Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations 2020 
(10.6 MB, 353 pages), 2020; Government of Canada, Old Age Security pension; Government of Canada, Registered Retirement Savings Plan (RRSP); Government of Canada, The Tax‑Free Savings Account; and Employment and Social Development Canada, Annual report of the Canada Pension Plan for fiscal year 2017 to 2018.
In 2005, the total cost of the retirement income system was estimated at over $80 billion. By 2017, expenditures exceeded $153 billion. Although per person spending has increased, the increases in costs are largely a function of population aging. In 2005, the population aged 65 years and over was estimated at 4.2 million, and by 2017, it was estimated at just over 6.1 million.4 Figure 1 illustrates federal spending for each of the three pillars of the retirement income system from 2005 to 2017. It also illustrates the growth of the senior population over this period.
Figure 1 – Federal Spending on the Three Pillars of the Retirement Income System and Population Aged 65 and Over, 2005–2017
Figure 1 shows the growth in federal spending on the three pillars of retirement income. Spending on Pillar One has shown an upward trend from 2005 to 2017, as has spending on Pillar Two, while spending on Pillar Three shrank following the 2008 recession before recovering lost ground in 2012 and subsequent years. The figure also shows how the number of seniors has also increased steadily between 2005 and 2017.
Note: Program expenditure estimates for pillars one and two are for the population aged 65 and over. Estimates are generated using tax data and are for the calendar year. Pillar One estimates include Department of Finance Canada estimates of the Age Credit. Pillar Two estimates are generated from tax data but also include Department of Finance Canada estimates on the tax expenditures related to Canada Pension Plan/Quebec Pension Plan deductions.
Sources: Figure prepared by the authors using data obtained from Statistics Canada, "Table 11‑10‑0039‑01: Tax filers and dependants, seniors with income by sources of income and age" (database), accessed 29 June 2020; and Department of Finance Canada, Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations 2020 (10.6 MB, 353 pages), 2020.
The first pillar – the OAS Program – is the foundation of the retirement income system. Between 2005 and 2017, OAS program spending combined with Age Credit tax expenditure rose from around $29 billion to exceed $52 billion, representing an 80% increase in spending.5
The second pillar – CPP and QPP – is related to workforce participation and is designed to replace earnings in retirement. Spending levels on CPP and QPP are similar to the first pillar when the tax treatment of contributions is considered. In 2005, federal spending was estimated at $29 billion. This increased to $52 billion in 2017, representing an 80% increase over the period.6
The third pillar – workplace RPPs and private savings – is the most volatile. Between 2005 and 2017, the tax expenditures that supported this pillar ranged from a low of around $18 billion during the 2008 recession to almost $49 billion in 2017. The variability is a function of what is happening in financial markets and in the larger economy.7
The characteristics of each pillar, the ways in which they are supported (i.e., general tax revenues, mandatory employee/employer contributions and tax expenditures) and the distributional effects of this financing will be discussed in more detail below. While each pillar plays a significant role in supporting the system as a whole, it should be noted that individual seniors likely do not receive equal support from each pillar.
For example, under the first pillar, OAS pensions are taxed back for seniors with high income. In 2017, the maximum annual income to be eligible to receive the OAS pension was about $119,000. It is estimated in that year that over 500,000 seniors had their OAS pension clawed back to various degrees. Around 200,000 of those seniors had high enough incomes that they were not eligible to receive any support from the first pillar.8 Under the second pillar, the maximum CPP/QPP benefit in 2018 was around $1,100 per month, amounting to just over $13,000 per year. However, the average CPP/QPP retirement benefit paid out was significantly lower, at around $570 per month, or about $6,800 per year.9 Finally, many seniors receive little‑to‑no support from the third pillar. Indeed, in 2016, 16% of seniors living in families and 36% of seniors living alone (over 1.2 million seniors) did not have any registered retirement assets (workplace RPPs, RRSPs or TFSAs).10
The OAS pension is a monthly payment available to most Canadians who are 65 years of age and over and meet the status and residency requirements. Its objective is to ensure a minimum income for seniors and to mitigate income disruptions at retirement. It was the first universal pension for Canadians, and no means test was required. The benefit was introduced in 1952, and at that time, the maximum annual benefit was $480 per year.11 By 2019, the maximum benefit exceeded $7,000 per year. In fiscal year 2018–2019, OAS pension expenditures exceeded $40 billion.12 The total number of OAS pensioners that year was approximately 6.3 million.13
The GIS is a monthly non‑taxable benefit provided to OAS pension recipients who have a low income and are living in Canada. The benefit has always been means tested and targets seniors with the lowest incomes. It was introduced in 1967 as a temporary measure to further reduce poverty among seniors.14 In fiscal year 2018–2019, GIS expenditures exceeded $12 billion.15 An average of 2 million seniors (about 33% of OAS pensioners) received GIS payments in addition to their monthly OAS pension. In order to receive GIS, these seniors were reporting annual incomes below roughly $18,000 for single seniors and $24,000 for couples.16
The Allowance was introduced in 1975. It is a benefit available to low‑income individuals aged 60 to 64 who are the spouse or common‑law partner of a GIS recipient. The Allowance acts like a bridge to help households with a younger spouse before they are eligible for OAS and GIS. Like GIS, it is a targeted means‑tested benefit. There is also an Allowance Survivor benefit available to people whose spouse or common‑law partner has died.17
Together, the OAS pension, GIS and the Allowance effectively function as a minimum income floor that ensures that low‑income seniors have a minimum or basic income guarantee. In 2019, the minimum guarantee was around $18,000 for single seniors and $26,000 for couples.18 This minimum income floor is funded through general tax revenues. This type of financing is often referred to as pay‑as‑you‑go because taxes currently being paid are paying for benefits currently being received.19
Figure 2 illustrates first pillar (OAS/GIS/Allowance) spending in the larger context of total budgeted federal spending in fiscal year 2018–2019. At over $53 billion, it represents the largest single government transfer. Put into context, during the same year, the Canada Health Transfer was $38.6 billion, fiscal arrangements with the provinces (Equalization) around $23 billion, children's benefits were $23.9 billion and the Canada Social Transfer was $14.2 billion. Total budgeted federal spending for 2018–2019 was around $346 billion.20
Figure 2 – Federal Budgetary Expenditures, 2018–2019 ($ billions)a
Figure 2 shows federal budget expenditures for 2018–2019. The graphic identifies the largest expenditures that make up federal government spending. They are as follows: the Canada Social Transfer ($14.2 billion); Employment Insurance ($18.9 billion); National Defence ($22.3 billion); Equalization and miscellaneous transfers to the provinces ($22.9 billion); public debt charges ($23.3 billion); the Canada Child Benefit ($23.9 billion); the Canada Health Transfer ($38.6 billion); and the largest single expense, Old Age Security (the pension, the Guaranteed Income Supplement and the Allowance, which together amount to $53.4 billion).
Notes:
Source: Figure prepared by the authors using data obtained from Government of Canada, "Consolidated statement of revenues and expenses," in "Section 1 – Summary tables and Appendices," Public Accounts of Canada 2019: Volume II – Details of Expenses and Revenues, 2019.
The Age Credit is a tax credit that reduces the tax burden borne by Canadian seniors. This type of preferential tax treatment is often referred to as a tax expenditure or government spending that is delivered through the tax system. Tax expenditures are discussed in greater detail in section 4 of this paper.
The credit is provided to individuals aged 65 and over. In 2019, it had a maximum value of around $1,125. It is income tested, meaning the credit amount is reduced by 15% of net income in excess of an annually indexed threshold amount ($37,790 for 2019). The credit is completely phased out at a high‑income threshold ($87,750 in 2019). Any unused portion of the credit may be transferred to a spouse or common‑law partner.21 In 2019, the tax expenditure associated with the Age Credit was estimated to be $3.8 billion.
The CPP and the QPP are public pensions funded through mandatory contributions by employers and employees, those who are self‑employed and the revenue earned on investments. The QPP is administered by the Government of Quebec, and Quebec residents participate in this parallel program instead of the CPP.22
These pension plans were established in the 1960s to respond to the fact that many Canadians experienced a drastically reduced standard of living in when they retired. At that time, there was growing support for an employment‑based pension plan that would be portable from job to job. Eligibility is based on age, and payments are based on the amount contributed over a person's working career. In addition to retirement benefits, the CPP and QPP include disability benefits, a survivor's pension, children's benefits and a death benefit. These benefits are designed to provide a modest replacement income.23
When it was introduced in 1966, the CPP was designed as a pay‑as‑you‑go program, similar to the way in which the OAS program currently operates. This meant that the benefits for one generation would be paid largely from the contributions of later generations. This approach made sense at the time given population growth, rapid wage growth and the labour force participation rate, as well as the low rates of return on investments.
In 1997, major reforms were introduced. It was recognized that the pay‑as‑you‑go approach would not be sustainable in the longer term. Legislative amendments were introduced to raise the level of funding. Contribution rates were increased, and the growth rate of benefits over the long term was reduced. In addition, contributions not needed to pay benefits immediately were to be invested in the financial markets through a newly created investment board, the Canada Pension Plan Investment Board.24
These legislative reforms transformed the CPP from pay‑as‑you‑go to a steady‑state model. This means that contributions will not need to increase dramatically to support a growing number of retirees. In addition, the amendments included provisions that ensured that any increases in benefits or new benefits provided under the CPP would be fully funded. In other words, any changes must follow the principle of intergenerational equity, making sure that each generation "gets what it gives" or pays for the benefits it will end up receiving. The CPP is reviewed every three years to ensure that funding requirements are being met.25
Benefits under the CPP are designed to replace a fixed proportion of a person's average annual earnings from their working career, subject to an annual earnings ceiling. In 2016, the government enacted legislation to enhance the CPP by increasing the percentage of earnings that will be replaced and by increasing the maximum amount of annual earnings that will be covered, beginning in 2019.26 By increasing both the replacement rate and the level of maximum pensionable earnings, the second pillar will be able to support more of the weight of the retirement income system.
The CPP expansion is illustrated in Figure 3. It shows the two‑stage process for CPP enhancement, which includes both an increase to the maximum earnings replacement rate and an increase in the maximum annual pensionable earnings.
Figure 3 – Design of the Canada Pension Plan Expansion
Figure 3 illustrates how Canada Pension Plan (CPP) benefits will be expanded between 2019 and 2025. First, the earnings replacement rate will increase from 25% to 33.33%. This will take place from 2019 to 2023. Second, the maximum annual pensionable earnings covered by the CPP will rise by 14% between 2024 and 2025. This means that the maximum pensionable earnings covered by the CPP will rise from a projected $65,700 in 2023 to $67,700 in 2024 and $79,400 by 2025.
Notes:
Source: Figure prepared by the authors using data obtained from Canada Revenue Agency, "The Canada Pension Plan enhancement – Businesses, individuals and self‑employed: what it means for you," Backgrounder.
Up until 2019, CPP replaced one‑quarter of a contributor's average annual earnings. Over the medium term, the CPP pension will aim to replace about one‑third of a contributor's annual earnings. To achieve this, the contribution rate paid by workers and employers will increase between 2019 and 2023. The degree to which a retiree can receive the higher pension rate will depend on how long they paid the higher contribution rate. Current retirees will continue to receive pensions at the older rates.
Put concretely, in 2018, employee and employer CPP contributions were each 4.95% of pensionable earnings. CPP expansion increases this rate gradually. In 2019, the employee and employer contributions rose to 5.10%. It is estimated that employer and employee contributions will need to increase to 5.95% by 2023 so that contributions will be able to fully cover the cost of a 33.33% earnings replacement rate.
But this is only half the story. The maximum level of pensionable earnings is also increasing. Traditionally, the maximum pensionable earnings level has risen more or less at the rate of inflation. In 2018, this maximum was $55,900, and in 2019, it rose to $57,400. As part of the CPP enhancement, this maximum level of pensionable earnings will rise higher than the rate of inflation for two years (from 2024 to 2025). The CPP expansion projects to increase the yearly maximum pensionable earnings to approximately $79,400 in 2025. This change to the earnings ceiling will have no effect on lower‑income workers. Higher‑income workers, however, will pay more in contributions and will in turn receive higher pension payments in retirement.27
In February 2018, the government of Quebec implemented enhancements to the QPP similar to those of the CPP. It introduced higher retirement pensions (the rate at which income is replaced will gradually increase from 25% to 33.33%), a gradual increase in the contribution rate from 2019 to 2025, as well as an increase to the maximum annual pensionable earnings as of 2024.28
The third pillar of the retirement income system consists of workplace RPPs and private savings (RRSPs and TFSAs). These retirement savings vehicles are not mandatory government pension programs; however, the government does offer incentives through the tax system to encourage Canadians to use these plans and accounts to save for retirement. Because workplace RPPs, RRSPs and TFSAs are financed through preferential tax treatment, there is a tax expenditure cost associated with them.29
The government does acknowledge that the tax system can be an effective way to implement a policy objective. Yet using tax incentives to encourage people to save for retirement "deviates from the core function of the tax system, at the cost of lower tax revenues." 30 In addition, tax expenditures decrease the administrative efficiency by increasing the complexity of the system. Longer forms are required. More effort on the part of taxpayers is needed to understand the system. Tax expenditures can also conflict with the neutrality of the system. Certain tax credits and deductions advantage certain types of behaviour of certain taxpayers. For example, pension splitting advantages married seniors, while many seniors are single (i.e., never married, divorced or widowed).31
Workplace RPPs are employer or union‑sponsored plans that allow both workers and employers to contribute. These plans receive preferential tax treatment in that workers can deduct their contributions from their taxable income to reduce the amount of tax owing. When the worker begins to draw a monthly pension, this amount is then taxable, albeit often at a lower tax rate than when the individual was working.32
RRSPs are retirement savings plans offered by financial institutions in which contributions can be used to reduce income tax owing. Any investment income or interest earned in the RRSP is usually exempt from tax as long as the funds remain in the plan. Contributors pay tax when funds are withdrawn.33
The TFSA is also available from financial institutions and it allows individuals to set money aside tax‑free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes; however, income earned in the account (such as interest, dividends and capital gains) is generally tax‑free.34
The Government of Canada also identifies the Pension Income Credit and pension income splitting as tax expenditures benefiting seniors.35 The Pension Income Credit allows those with eligible workplace RPP, superannuation or annuity income to claim up to $2,000 per year. The value of the credit is calculated by applying the lowest personal income tax rate to the first $2,000 of eligible pension income. Any unused portion of the credit may be transferred to a spouse or common‑law partner. It is a non‑refundable credit meaning an individual can only claim the benefit if they have tax owing. Pension income splitting allows a spouse to give up to 50% of eligible registered pension income to their spouse for tax purposes. Canadian residents receiving income that qualifies for the Pension Income Credit can access this preferential tax treatment.36
Higher income families disproportionately benefit from tax expenditures that encourage retirement savings. This distributional impact is most apparent in the case of RRSPs. Figures 4a and 4b illustrate RRSP and workplace RPP contributions by after‑tax family income, represented in quintiles. Each quintile contains 20% of all families, and families are arranged from the 20% of families with the lowest income to the 20% with the highest income. Thus, families in the highest quintile have after‑tax incomes higher than 80% of the population.
Figure 4a – Proportion of Families that Made Workplace Registered Pension Plan (RPP) or Registered Retirement Savings Plan (RRSP) Contributions, by After‑Tax Family Income Quintile, 2015
Figure 4a shows the proportion of families in each after‑tax income quintile that made workplace registered pension plan (RPP) or Registered Retirement Savings Plan (RRSP) contributions in 2015. Participation rates rose consistently from the lowest quintile to the highest. RRSP participation rates were slightly higher than participation rates for workplace RPPs. In the lowest quintile, around 2% of families contributed to a workplace RPP and around 5% contributed to an RRSP. In the highest quintile, about 70% of families contributed to a workplace RPP and around 80% contributed to an RRSP.
Note: The first quintile reflects the lowest after‑tax family income; the fifth quintile represents the highest after‑tax family income. After‑tax family quintile amounts are, from lowest to highest: under $24,982; between $24,982 and $43,158; between $43,159 and $65,624; between $65,625 and $100,040; and over $100,040.
Source: Figure prepared by the authors using data obtained from Statistics Canada, The Social Policy Simulation Database and Model (SPSD/M) (database), accessed 29 June 2020.
Families in the highest quintile accounted for over two‑thirds of all RRSP contributions.37 Not only are people in high‑income families more likely to contribute to an RRSP, they are also more likely to make larger contributions. In 2015, 80% of families in the highest quintile contributed to an RRSP. On average, they contributed $10,650 during that year.
Figure 4b – Average Workplace Registered Pension Plan (RPP) and Registered Retirement Savings Plan (RRSP) Contributions per Contributing Family, by After‑Tax Family Income Quintile, 2015
Figure 4b shows the amount of average workplace registered pension plan (RPP) and Registered Retirement Savings Plan (RRSP) contributions per contributing family by after‑tax family income quintile in 2015. Average workplace RPP contributions increased consistently by income quintile. The lowest quintile contributed $745 while the highest contributed $5,776. The story is different with RRSP contributions. Contributing families in each of the lowest three quintiles contributed, on average, between $3,000 and $3,700 to an RRSP. Contributions in the fourth quintile were slightly higher at around $4,800. In the highest quintile, however, contributions averaged around $10,650.
Note: The first quintile reflects the lowest after‑tax family income; the fifth quintile represents the highest after‑tax family income. After‑tax family quintile amounts are, from lowest to highest: under $24,982; between $24,982 and $43,158; between $43,159 and $65,624; between $65,625 and $100,040; and over $100,040.
Source: Figure prepared by the authors using data obtained from Statistics Canada, The Social Policy Simulation Database and Model (SPSD/M) (database), accessed 29 June 2020.
In contrast, families in the lowest quintile accounted for around 1% of all contributions in 2015. This is because less than 5% of the lowest‑earning families contributed to an RRSP, and of those who did, the average contribution was about $3,270, less than one‑third of the average contribution by the highest‑earning families.
Figure 5 illustrates the total amount of RRSP contributions by after‑tax family income quintile for the 2015 tax year. It shows the compounding effect of people in high‑income families being more likely to contribute to an RRSP also being more likely to make larger contributions.
Figure 5 – Estimated Registered Retirement Savings Plan Contributions by After‑Tax Family Income Quintile, 2015
Figure 5 shows estimated Registered Retirement Savings Plan (RRSP) contributions by each after‑tax family income quintile for 2015. The highest quintile accounts for the majority of RRSP contributions ($26.6 billion). Contributions decrease in tandem with each quintile, with the lowest quintile accounting for the lowest amount of contributions ($486 million).
Note: The first quintile reflects the lowest after‑tax family income; the fifth quintile represents the highest after‑tax family income. After‑tax family quintile amounts are, from lowest to highest: under $24,982; between $24,982 and $43,158; between $43,159 and $65,624; between $65,625 and $100,040; and over $100,040.
Source: Figure prepared by the authors using data obtained from Statistics Canada, The Social Policy Simulation Database and Model (SPSD/M) (database), accessed 29 June 2020.
Recent research from the Parliamentary Budget Officer (PBO) tells a similar story for the TFSAs: the benefits of TFSAs – higher levels of savings combined with lower taxes – are more likely to accrue to high‑wealth households. A study released by the PBO projects that, by 2060, TFSA benefits to families in the highest quintile of wealth will be twice those going to families in the median quintile and 10 times those going to families in the lowest quintile. As noted by the PBO, these benefits come at the expense of forgone government revenues.38
The disparities with respect to the distribution of benefits in the case of workplace RPPs are not quite as extreme as those of RRSPs and TFSAs. However, figures 4a and 4b illustrate that contributions to workplace RPPs similarly increase by income quintile. These distributional trends remain when controlling for age (i.e., only considering families with a member aged 45–54 years old).
Most families in the highest income quintile (70%) contributed to a workplace RPP in 2015. The average contribution was $5,776. Almost no lowest‑income quintile families contributed to a workplace RPP (2%), and when they did, these contributions were substantially lower than other quintiles ($745). This is not surprising given that higher paying jobs are more likely to come with pensions, and that the dollar amount of pension contributions increases with salary level.
Perhaps the more important insight from the data is that 63% of people who made contributions to a workplace RPP also made an RRSP contribution, while only 26% of people without any workplace RPP contributions contributed to an RRSP. It suggests that RRSPs may not be an effective substitute for people who are not able to participate in a workplace RPP.
In 2015, it is estimated that only 20% of seniors benefiting from pension income splitting belonged to families with after‑tax income family incomes of less than $53,000. In addition, 40% of those benefiting had after‑tax family incomes greater than $88,000. Moreover, as with RRSPs, there is also a compounding effect. Families with after‑tax incomes greater than $88,000 accounted for almost half of the value of total pension income–splitting deductions.39
The government delivers the retirement income system through two principal instruments:
Information related to OAS and CPP/QPP program spending is accessible to anyone with an Internet connection. Employment and Social Development Canada (ESDC), Treasury Board of Canada, the Office of Superintendent of Financial Institutions and the Office of the Chief Actuary regularly publish data, statistics and detailed reports on program costs and the population receiving benefits. In addition, the Financial Administration Act requires ESDC to conduct a review the relevance and effectiveness of these programs every five years.40
In contrast, information related to the tax expenditures that support workplace RPPs, RRSPs, and TFSAs, pension income splitting (even to a certain extent the tax expenditures that support worker contributions to CPP and QPP) is more difficult to find, especially with respect to the population that accesses and benefits from these tax expenditures.
While government accounting best practices do take the reporting of tax expenditures into account, it is often difficult to compare tax expenditures with program spending, even when they may serve a similar purpose. There is also no requirement that they be evaluated. Moreover, unlike all other public expenditures, there is not currently an established process for parliamentarians to review tax expenditures.41
Finally, it is noted that private members' legislation is not allowed to call for new program spending without Royal Recommendation.42 However, private members' legislation that proposes a new tax expenditure by imposing or increasing an exemption from taxation is allowed.43 As a result, tax expenditures can be an attractive policy tool for sponsors of private members' bills.
Figure 6 provides another snapshot of the financing of Canada's retirement income system. It compares program spending with tax expenditures. In 2017, the cost of program spending on OAS, GIS, CPP and QPP exceeded $91 billion. That same year, the cost of tax expenditures related to seniors was estimated to exceed $62 billion.44
Figure 6 – Program Spending and Tax Expenditures that Support the Retirement Income System, 2017 ($ billions)
Figure 6 illustrates the financing of Canada's retirement income system by spending mechanism. The graphic compares program spending with tax expenditures for 2017. It shows that program spending totalled $91.1 billion that year, whereas tax expenditures amounted to $62.4 billion. Program spending included both Pillar One programs ($37.6 billion on Old Age Security and $11.2 billion on the Guaranteed Income Supplement) and Pillar Two programs ($42.3 billion on the Canada Pension Plan/Quebec Pension Plan). Tax expenditures included Pillar Three spending (workplace registered pension plans at $28 billion; Registered Retirement Savings Plans at $17.3 billion; Pension Credits at $2.5 billion; and Tax‑Free Savings Accounts (at $1 billion), as well as Pillar Two spending of $10.1 billion on the Canada Pension Plan/Quebec Pension Plan; and Pillar One spending of $3.5 billion on the Age Credit.
Note: The first pillar is shown in dark blue, the second pillar in yellow, and the third pillar is grey. Pension credits include the Pension Income Credit and pension income splitting. While the Quebec Pension Plan (QPP) is not administered by the federal government, it acts as a substitute for the Canada Pension Plan (CPP) for residents of Quebec. In order to consider the costs of retirement nationally, QPP is included. Tax expenditure related to CPP/QPP refers to only the federal tax treatment of contributions to these programs.
Sources: Figure prepared by the authors using data obtained from Statistics Canada, "Table 11‑10‑0039‑01: Tax filers and dependants, seniors with income by source of income and age" (database), accessed 29 June 2020; and Department of Finance Canada, Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations 2020 (10.6 MB, 353 pages), 2020.
Canada's retirement income system, with its three pillars and mixed funding approaches, has proven remarkably resilient over the years. Ensuring that benefits are adequate while respecting intergenerational fairness and sustainability will always be challenging. Much of the cost of the retirement income system is borne by working‑age Canadians, and the financial significance of the system can limit government funds available for programs that benefit younger Canadians. Yet the system offers policymakers a range of tools that can be used to address these challenges and adapt to changing conditions.
Moving forward, 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 may need to take a closer look at future retirement income adequacy for middle income earners.45
† Library of Parliament Background Papers provide in‑depth studies of policy issues. They feature historical background, current information and references, and many anticipate the emergence of the issues they examine. They are prepared by the Parliamentary Information and Research Service, which carries out research for and provides information and analysis to parliamentarians and Senate and House of Commons committees and parliamentary associations in an objective, impartial manner. [ Return to text ]
(10.6 MB, 353 pages), 2020, p. 37. These figures have not been adjusted for inflation. [ Return to text ] (548 KB, 40 pages), Discussion paper, Experts Panel on Income Security, Council on Aging of Ottawa, June 2019, p. 18; and ESDC, Evaluation of the Old Age Security program: Phase 2. [ Return to text ] (752 KB, 10 pages), Office of the Parliamentary Budget Officer [PBO], 1 June 2011. [ Return to text ] (1.2 MB, 35 pages)," Presentation to the Institute for Governance of Private and Public Organizations, Montréal, 5 April 2019, p. 3; and Allen Buckley, "Do Tax‑Qualified Plans Still Make Sense? (1.0 MB, 84 pages)," Journal of Pension Benefits, Vol. 18, No. 3, 2011, pp. 60–61. [ Return to text ] (444 KB, 35 pages), PBO, 24 February 2015. See also Richard Shillington, Are Low‑Income Savers Still in the Lurch? TFSAs at 10 Years, Institute for Research on Public Policy, 9 April 2019. [ Return to text ] (3.0 MB, 111 pages), 8 June 2017; and Jacques (2011). [ Return to text ][ Return to text ][S]ection 54 of the Constitution Act, 1867 has been summarized by Eugene Forsey in the following terms: "It [the cabinet] has the sole power to prepare and introduce bills providing for the expenditure of public money." This is known as the Royal Recommendation as the purpose behind the appropriation of public funds is recommended to the House of Commons by Message of the Governor General.
(3.3 MB, 58 pages), 9th ed., Library of Parliament, Ottawa, 2016, p. 6. See also Senate, Rules of the Senate of Canada, October 2020, Rule 10‑7; House of Commons, Standing Orders of the House of Commons – Consolidated version as of April 20, 2020, Standing Order 79(1); and House of Commons, "Private Members' Business," Our Procedure. [ Return to text ] (1.5 MB, 30 pages), National Institute of Aging, February 2020. See also Baldwin (2019). [ Return to text ]© Library of Parliament