Montreal – The plan to enhance Canada Pension Plan benefits, announced with much fanfare by Canada’s finance ministers a year ago, will not do much to improve the retirement income prospects of low-income workers. It also fails to take into account the impact of demographic and labour market changes on the retirement income system, says a new study from the Institute for Research on Public Policy.
Since taking office in the fall of 2015, the Liberal government has made important changes to Canada’s retirement income system including restoring the age of eligibility for Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) to 65; increasing the GIS top-up for single elderly persons; and agreeing with the provinces to enhance CPP benefits, starting in 2019. However, as Bob Baldwin and Richard Shillington show in their study, although each these changes on its own appears positive, the way they interact with each other and with the tax system is problematic.
In particular, they find that “the CPP increase will be of little value to low-income earners, because most of it will be taxed back through income taxes and reductions in other social benefits, which are income-tested.” They call for a full review of overlapping tax rates and clawbacks, which undermine the usefulness of preretirement saving for low-income earners and of staying employed for older workers.
Indeed, the authors note that the reforms do not take into account the implications of population aging for Canada’s retirement income system. For instance, slower labour force growth is expected to increase real average wages, which means that for low-income earners the increased earnings replacement value of CPP benefits may be more than offset by the declining value of OAS benefits relative to wages.
Baldwin and Shillington also question whether age should remain the main criterion for establishing eligibility for all these programs, given increased longevity, later retirement and younger people starting work at later ages.
“After the latest round of changes to the retirement income system, much unfinished business remains. Given the complex interactions involved and the significant policy challenges that lay ahead, what is required is a more comprehensive and forward-looking approach to pension reform,” the authors conclude.
The Institute for Research on Public Policy is an independent, national, bilingual, not-for-profit organization based in Montreal. To receive updates from the IRPP, please subscribe to our e-mail list.
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