Directorates
·	Director General's Office
·	Data Development
·	Strategic Evaluations
·	Partnership and Continuous Evaluations
Publications
·	Evaluation Reports
·	Evaluation Briefs
·	Labour Market Development Agreement Series
·	Lessons Learned Series
·	Evaluation Tool Kit Series
·	Evaluation Forum Newsletter
·	From Theory To Practice

The previous discussion highlighted the potential incentive effects of the different features of private, employer-sponsored pension plans for employees of different wage levels. In this section, those incentive effects are analyzed when they are combined with those of public pension plans based on the simulations employed in Gruber (1997). The public plans include the employment-based CPP/QPP, the universal OAS system, and the means-tested GIS and SPA. These are subsequently described as SS benefits as in the Gruber study. To highlight the effect of combining the public plans with the private plans, the combined accruals are presented in every second column in each of the previously discussed Tables A through D.

Basic Plan: As indicated in Table A, for the base-case situation, the pension wealth accruals in the public plans are generally in the opposite direction of those of the private plans. Specifically, the accruals (year-over-year increases in the present value of pension wealth) under the public plans are negative albeit smaller than those of the private plans until the age of 65. As such, they reduce but do not reverse the positive accruals of the private plans. After age 55, the total accruals are fairly constant at around 13% of earnings. At age 65, however, the total accruals become sharply negative as a result of the negative effect of the public plans.

Overall, the combined effect of private and public pension plans, when the private plans have no early or special retirement features, is to create a mild incentive to continue working between the ages of 55 and 65, so as to accumulate pension wealth accruals typically of around 13% of earnings. This is the result, however, of the negative incentive effects of the public plans being more than offset by the positive incentive effects of the private plans. After age 65, there are strong financial disincentives emanating solely from the public plans.

Bridging Supplements: When bridging supplements are added, so that the CPP/QPP integration offset is waived for persons who take early retirement, a similar pattern prevails as when there is no bridging supplement, with two notable differences. The bridging supplement gives rise to a huge spike or pension wealth accrual at age 55, as occurred previously under the private plans alone. Similarly, the subsequent changes in accruals are smaller, more in the neighbourhood of 6% of wages until the age of 65. This reflects the fact that the "value" of the bridging supplement is capitalized into pension wealth at the age of 55 when it first becomes available; thereafter, although the stock of pension wealth remains higher, the increments to that wealth are smaller because they are already capitalized into the larger base from which the increments are calculated.

Overall, the total private and public financial incentives under the Basic Plan with bridging supplements are to encourage early retirement at age 55 when the bridging supplement first applies. If one does not retire at that age, there is a mild incentive to continue working since total pension wealth is augmented slightly because the positive wealth accruals from the private plans slightly offset the negative accruals from the public plans. Whether the small positive pension wealth accruals are sufficient to offset any increased disutility of work is an open question. At age 65, however, there is a strong incentive to retire since pension wealth accruals become negative at that age.

Subsidised Early and Special Retirement: Combining the public pension plans with the private pension plans has a similar effect when the private pension plans have subsidised early retirement and subsidised early and special retirement. Essentially, the pattern of positive pension wealth accruals from the private plans prevail, but that pattern is increasingly offset by the negative accruals that emanate from the public plans between the ages of 55 and 60, totally offset after the age of 60 as a result of the large negative effects from the public plans.

Summary of Private and Public Base-Case Accruals: After age 55 the public pension plans can be characterized as having negative accruals that become increasingly negative with each year, and with a large negative drop at age 65. ²⁰ This pattern is imposed on the pattern of the private pension plans. That pattern is more varied, with large spikes or positive accruals in particular years, such as when a person turns 55, when bridging supplements and subsidised early retirement may apply, or age 60, when special retirement may apply. Usually the spikes associated with the early and special retirement features are followed by declining accruals that become negative (and substantially so) around age 65 and even after age 60 if special retirement applies.

Clearly, both public and private plans create financial incentives that can have a potentially important effect on the retirement decision. The public plans themselves generally create an inducement to retire early because of the negative pension wealth accruals associated with continued work. Certainly, there is a strong incentive to retire before age 65, after which the "penalties" become substantial, in the order of 30% of wages each year for a median wage earner.

The financial incentives of private pension plans are more complex, reflecting the different institutional features of those plans. When combined with the public plans, they may offset the negative pension wealth accruals associated with continued work, at least if there are no bridging or early and special retirement features.

Bridging supplements and subsidised early and special retirement features create strong incentives to work until those milestone dates when those features first apply, and then to retire. Nevertheless, the positive pension wealth accruals that generally prevail even after those milestone dates still provide an incentive to continue working and accumulate the additional pension wealth. The total combined public and private pension wealth accruals become negative only after age 60 when there is subsidised early and special retirement, and around age 65 when there is no subsidised early or special retirement.

Total Private and Public Accruals for Low-Wage Employees: Table B gives the total private and public pension accruals for the extreme case of a very low-wage employee at the bottom 10th decile of the wage distribution. As indicated in the third row, the total accruals drop more rapidly for a low-wage employee (Table B) compared to a median-wage employee (Table A), and they take on larger negative values around and after the age of normal retirement of 65.

This pattern is entirely a result of the negative public pension wealth accruals that increase with age under the public pension plans and that are especially prominent for low-wage employees. The negative accruals are more prominent for low-wage employees because, if they continue to work, they face clawbacks or reductions in public pensions that are means tested. Low-wage employees face higher (implicit) taxes on earned income than do higher wage employees because their means-tested benefits are reduced if they continue to work and earn income. This is a natural by-product of transfer programs that are targeted to the poor but that try to reduce spillover benefits to the non-poor by reducing the transfer as income rises.

Such clawbacks, however, can have adverse work incentive effects, especially when they involve implicit taxes of just over 50% as is common for older, very low-wage employees who would work beyond the age of 65 as shown in Table B. ²¹ The irony is that low-wage employees may have little financial incentive to continue working to alleviate any poverty condition. This occurs not only because of the low-wage they receive, but also because of the high (implicit) taxes they face. The taxes may be implicit in that they involve reductions in transfer payments, but that is no less real than taxes that are explicitly levied.

Total Private and Public Accruals for High-Wage Employees: The total private and public pension wealth accruals for employees at 150% and 200% of the median base-case wage are illustrated respectively in Tables C and D.

Negative accruals are much smaller and come much later because high-wage employees are not subject to the clawbacks of public pension plans. Otherwise, the general pattern of incentives are similar to those of median-wage employees (Table A).

There is some limited international comparative analysis for public pension wealth effects. Pension accrual effects at older ages are an important consideration in the retirement decision in many countries ²² Canada compares favourably with respect to disincentives to continued working at older ages. One measure — implicit tax on further work between the ages of 55 and 69 from social security programs — suggests that work disincentives in Canada are among the lowest in the industrial world, only marginally higher than the U.S., Japan and Sweden and much lower than most Western European countries.²³

Footnotes

20	See Gruber (1997).
21	This is the case for the worker in the household being simulated who, if he or she works in the 66th year, faces an implicit tax of 52% (the combined negative private and public accrual rate without the bridging supplement). These estimations are for the 10th deciles of the wage distribution.
22	See Organization for Economic Cooperation and Development, Maintaining Prosperity in an Aging Society, (Chapter 3 Ageing Populations, Labour markets and The Retirement Decisions), 1998.
23	See Jonathan Gruber and David Wise, eds. Social Security Programs and Retirement Around the World, A National Bureau of Economic Research Conference Report. Chicago and London: The University of Chicago Press, 1999.