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This is an examination of the financial incentives implied in the Canadian public retirement program, namely those of the current public “safety net” programs for seniors — Old Age Security (OAS), and the Canada/Quebec Pension Plan (CPP/QPP). It models the financial incentives for continued work force attachment, or retirement, which are implied in the current public pension programs and income tax system for individual workers under a restricted set of household assumptions (e.g., with uninterrupted earnings histories, mainly at median earnings, entitled to a full CPP/QPP pension). In these cases, the structure of these public retirement plans leads to both taxes and subsidies to individuals considering retirement at different ages.¹

Government transfers to older persons in Canada through the Canada/Quebec Pension Plan, Old Age Security (the basic benefit), the associated Guaranteed Income Supplement (GIS), and the Spouse's Allowance (SPA) are one of the largest and fastest growing components of the government budget. Total expenditures on the four primary transfer programs (CPP, OAS/GIS/SPA) for older Canadians amounted to $41 billion in 1995, which was 23% of the federal budget and 5.3% of Gross National Product (GNP) in that year. In 1970, total expenditures were only $2 billion, amounting to just 14% of the federal budget and 2.3% of GNP. Moreover, even with the recently announced revisions to the CPP/QPP, rapid growth in these programs for seniors appears likely in the future. The ratio of persons 65 and over to persons 20-64 is projected to grow from its current level of 19% to over 40% by the year 2075. The payroll tax necessary to finance the major social insurance program for older persons, the Canada/Quebec Pension plan, is scheduled to grow from its current level of 7.0% of wages to over 9.9% by the year 2003 and stabilize at that level by the year 2010. Similar cost increases are also in store for the other three major transfer programs to older Canadians, which are financed from general revenues: the Old Age Security demogrant, and the income-tested Guaranteed Income Supplement and Spouse's Allowance programs.

The OAS program will grow in cost as the population ages; however, its growth in relation to GDP will depend on the relative growth of prices, compared to economic growth, since OAS benefits are linked to the CPI (Consumer Price Index) rather than wages; starting values of CPP retirement pensions, on the other hand are linked to wages. But for understanding the implications of any potential reforms, it is critical to understand how this complicated web of programs affects the retirement decisions of older Canadians. For the median household where the head is over age 65, these four social security programs represent 61% of total family income; for 23% of such households, they provide more than 90% of family income.² As a result, it seems likely that the structure of the social security program has important effects on the life cycle savings and labour supply decisions of households, and in particular on their retirement decisions. But there has been little empirical analysis of either the retirement incentives under the Canadian system, or the effects of those incentives on labour market behaviour of older workers.

The purpose of this paper is to provide an overview of the interaction between social security programs and the labour force behaviour of older persons in Canada. This is provided in four steps. Part I documents the pertinent facts about the labour market behaviour of older persons in Canada, both today and over time. Part II describes the structure of the system of income support programs for older persons in Canada, summarizing the relevant institutional details for thinking about retirement behaviour. Part III presents the results of a simulation model designed to document the retirement incentives inherent in these programs for current cohorts of retirees under certain restricted assumptions. Finally, Part IV concludes by considering the implications of the findings.

Footnotes

1	This analysis does not take into account the changes to the CPP, which took effect in 1998. See Federal Budget, March 6, 1996, and Finance Canada, Securing the Canada Pension Plan, February 17, 1997. Prior to the reforms, the CPP contribution rate was projected to increase to 14.2% by 2030 in order to pay for promised benefits.
2	Author's tabulations of the 1992 Survey of Consumer Finances.