![]() |
![]() |
![]() ![]() ![]() ![]() ![]() |
||
![]() |
![]() ![]() ![]() ![]() ![]() |
![]() |
![]() |
Chapter II examines the rationale for a compulsory and contributory CPP retirement pension system within the retirement income system. The chapter summarizes the evaluation findings for the evaluation questions "Is a compulsory and contributory CPP still warranted in the changing system of public and private pensions?" (Terms of Reference, Question B.1) and "What messages need to be sent to Canadians about the role and viability of CPP?" (last part of Terms of Reference, Question B.5). 2.1 COVERAGE BY PRIVATE PENSION PLANS It was originally expected that private pension plans would top up or supplement C/QPP. Criticism regarding adequacy of coverage in the private pension system have been the major driving force behind past proposals to change the public pension plan. They call into question whether or not expectations regarding private pension coverage will be met. In 1991 the National Advisory Council on Aging argued that private pension coverage, and provisions for vesting, portability, survivors' benefits and indexing have not lived up to initial expectations.5 Analysis shows that criticisms concerning the adequacy of coverage in the private pension system are more true for some sectors of the working population than for others. 2.1.1 Registered Pension Plans (RPPs) The most recent change in the legislated minimum standards for RPPs began with amendments to the federal Pension Benefits Standards Act of 1985,6 which took effect on January 1, 1987. Statistics Canada data show that: The new provisions should improve the retirement incomes of workers who are covered. As well, the provisions could increase coverage as time passes, since more younger workers will move into the age groups where coverage is highest. On the other hand, they might have slowed or even reversed the growth of employer-sponsored plans, and contributed to the recent trend toward money purchase plans and away from defined benefit plans. Most private plan members were in trusted plans, accounting for about 80 percent of plan assets in 1989. In this context, the RPPs also include employer-based pensions for public service (federal, provincial, municipal) workers. The balances in such plans increased from $13 billion in 1971 to over $177 billion in 1989. Nevertheless, the current challenge is that only 49% of paid workers aged 20 through 64 were covered by employer-sponsored plans in 1989, but with big differences by firm size, earnings level, age and gender, and between the public and private sector:8 Changes in the labour market such as more part-time workers, more job turnover, more self-employed workers and small employers, problems caused by high unemployment rates and poverty have also contributed to the low level of work-related pension coverage. These developments now place in doubt the expectation that a sufficient number of lower-income Canadians will acquire private-pension entitlements throughout their working lives, a major assumption underlying the design of Canada's public pension system.9 At the same time the integration of the C/QPP with the RPPs has meant that the C/QPP has become a cornerstone of the RPP system. In this regard concern has been expressed that the rising cost of C/QPP may hamper efforts to expand the private pension system if it reduces contributions to RPPs.10 2.1.2 Registered Retirement Savings (RRSPs) The total value of RRSP holdings increased dramatically over the decade (1981-91), from about $21.9 billion in 1981 to nearly $130 billion in 1991, and almost doubled between 1986 and 1991.11 As with RPPs, the data on RRSPs show that the private pension programs are more important for higher-income workers. Although about 20% of tax-filers contributed to an RRSP in 1987, there is substantial variation by income range and age group.12 A recently completed study reveals that in 1992 about one-quarter of people earning less than $30,000 contributed to an RRSP, with an average contribution of less than $2,000. This contrasts with people earning $80,000 or more, of whom 81% contributed to an RRSP with an average contribution of $7,200.13 Lower-income earners have less tax incentive to employ RRSPs since they are in a lower tax bracket and the availability of OAS and income-tested benefits like GIS/SPA and provincial welfare assistance makes the need to invest in RRSPs much less important. Part of the explanation for the relationship between lower earnings and lower incidence of RRSP contributions may reflect the fact that both income and RRSP contributions rise with age. In general younger people may have less income, and are more concerned with current consumption rather than distant retirement prospects--a potential advantage of the compulsory CPP. On the other hand, older people defer more income, partly because they spend less on children and mortgages, etc., and partly because the reality of retirement is closer and more visible. An examination of 1992 taxfiler data revealed that the proportion of tax-filers contributing to the public pension system (C/QPP) in 1992 overwhelms that contributing to RPPs and RRSPs among the lower-income groups (Exhibit II-1). About 75% of tax-filers in the $20-29,999 income range in 1992 contributed to C/QPP compared with 23% and 29% to RPPs and RRSPs respectively; 62% of tax-filers in the $10,000-19,999 income range were C/QPP contributors compared with 9% and 17% for RPPs and RRSPs respectively, in 1992. Taxfiler data for 1991 reflect almost the same distributions. Some contributors over 65 years of age, mainly in the higher tax brackets, would have made some RRSP contributions, a few over 65 years of age, RPP contributions. EXHIBIT II-1: Retirement Saving Contributions by Taxfilers, Proportion Contributed by Selected Income Classes, 1992 (Percentages)
Source: Revenue Canada, Taxfiler Data Base, 1992
2.2 NEED FOR A COMPULSORY AND CONTRIBUTORY CPP The relative importance of earnings replacement through public and private pension plans in the future may depend on trends in the nature of work and employment. The characteristics of new jobs have changed, and many are "non-standard," often part-time jobs which may pay lower wages and are less likely to have employer-sponsored RPPs: Recent trends in private pension plan coverage and in the distribution of new jobs toward part-time, short-term and low-wage positions raises the question as to whether there will be any significant increase in RPP coverage for lower income workers in the future. The projected increase in CPP contribution rates might also reduce the contributions to RPPs since most RPPs are integrated with the C/QPP. And although RRSP contributions have risen substantially in recent years, both the incidence of contributions and the average contribution are sensitive to income levels and the income distribution in society. Since lack of private sector pension coverage is particularly noticeable among lower-earnings workers, it is all the more important that the public pension system provide adequate replacement for those below average earnings. For this reason it confirms that a compulsory publicly operated CPP is a complementary part of any public/private national seniors benefit program with voluntary private pension components (RPPs, RRSPs). A compulsory and contributory CPP is also justified on the grounds that younger individuals may be more concerned with consumption than distant retirement prospects. They often face heavy financial obligations associated with establishing separate households and families, e.g., acquiring housing, raising and educating children, and therefore a compulsory plan is necessary. Potential efficiencies in administration costs, security and public acceptance of such a plan in a country like Canada, also argue in favour of a publicly operated pension plan. This analysis takes into consideration the fact that voluntary RPPs and RRSPs are not intended to meet the needs of the lowest-income seniors; the latter rely much more on the public pension system as a whole (CPP, OAS/GIS) and tax credits; the public pension system replaced 91% of disposable income for a single senior at half pre-retirement average earnings, and half CPP benefits in 1993 (Chapter III, Section 3.3). As well, the existence of an income-tested GIS and complementary provincial programs makes a compulsory/ contributory CPP program warranted in this public-private pension system. 2.3 CONCLUSIONS There is a continuing need for a compulsory and contributory CPP pension program. Private pension plans and RRSPs provide inadequate coverage, especially for lower-income and part-time workers, for private sector employees, and those in smaller firms. The CPP is a complementary part of any public/private national seniors benefit program comprised of voluntary private pension components (RPPs, RRSPs), the OAS, the income-tested Guaranteed Income Supplement (GIS) and complementary provincial programs.
|