Canadas Retirement Income System Issues and Options Ontarios

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:

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

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 3

PILLAR 1: Universal Government Benefits § Federal seniors benefits include: 1. Old Age Security (OAS) 2. Guaranteed Income Supplement (GIS) 3. Spouses Allowance (SPA) Ontario (and other provinces and territories) supplement federal benefits to low-income seniors 4

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 5

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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 7

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

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) 9

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 nonfinancial assets 10

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

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

Canadian Retirement Income System: 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. 13

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 14

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

Canadian Retirement Income System: Key Options § Major stakeholder proposals for reform: 1. Expansion of public pensions (CPP) 2. Supplementary DC pension plans 3. Pension Innovation 4. Reforms to Tax Assistance 16

Key Questions for Discussion § Why do we need to strengthen Canada’s retirement income system? q In your view what research or evidence demonstrates that people are not saving enough for retirement? q 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? q How would your proposal work? q What do you think it might cost? q How would costs be allocated among employees, employers, etc. ? q Would it be voluntary (e. g. opt-out) or mandatory? q How might other stakeholders be affected? 17