Phase I of the Evaluation of the Canada Pension Plan (CPP) - July 1995

Chapter II - Program Rationale

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:

by January 1, 1990 more than 70% of RPP members had full vesting after two years;

in 1970 only 7% of members were in plans with some form of automatic adjustment for inflation, usually limited to 2% per year; by comparison, in 1989 more than one-third of workers were in plans with some adjustment for inflation; and

more RPPs now provide a "bridging benefit" until C/QPP and OAS come into pay, and some two-thirds of RPP members are in plans with some form of C/QPP integration.⁷

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

54% of men were covered, and 42% of women;

73% of public sector workers were covered, and 39% of workers in the private sector;

53% of full-time workers 20 years of age and over were covered, comprising 80% of workers in the public sector and 43% in the private sector, but only 24% of part-time workers were covered;

81% of men and 66% of women in the public sector were covered, but only 47% of men and 30% of women in the private sector;

less than 15% of workers in firms employing less than 20 people were covered, but 72% in firms employing 500 or more; and

coverage was 82% for those with earnings between $40,000 and $60,000, and 27% for those earning less than $20,000.

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

About 15% of tax-filers with income from $10,000 to $19,999 contributed, compared with over 50% of tax-filers in higher income brackets, reaching 68% among those with incomes of at least $100,000.

Little more than 1% of total contributions was made by the 34% of tax-filers reporting income of less than $10,000.

Nearly 44% of contributions were made by tax-filers aged 50 and over.

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)

EXHIBIT II-1:
INCOME LEVEL	C/QPP	RPPs	RRSPs
$10-19,999	62.3	9.1	17.3
$20-29,999	75.2	23.1	29.4
$30-49,999	85.1	42.2	47.1
$50-74,999	88.5	51.5	62.6
All groups	62.2	19.2	25.3

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:

in the ten years since 1981, part-time workers increased from 9% of employees to 19%;

about three-quarters of all new jobs in the past 25 years have been created in service industries, typically non-union and usually with lower wages;

on the other hand, because plan participation increases with age, the pension system ultimately could absorb many of the younger workers as they get older.¹⁴

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.

⁵Intergovernmental Relations and the Aging of the Population: Challenges Facing Canada, National Advisory Council on Aging, Ministry of Supply and Services, March 1991. Back
⁶This legislation and almost all the provincial legislation enacted during the 1980s made vesting mandatory after a short period of employment. Also changes were made in the "locking-in" provisions of occupational pension plans. Recent legislation prevents the forfeiting of pension contributions when a worker leaves an employer. Back
⁷Weitz, Harry: The Pension Promise: The Past and Future of Canada's Private Pension System, Thompson Canada Ltd, 1992. Weitz analyzed Statistics Canada data Back
⁸ Trusted Pension Funds: Financial Statistics, Statistics Canada, 1991; Frenken, Hubert & Karen Maser: "Employer-Sponsored Pension Plans - Who is Covered?" Perspectives on Labour and Income, Statistics Canada, Winter 1992.

About 92% of plan members participated in 'defined benefits plans' in 1986, which define the pension benefits based on earnings and years of service. Most of the remaining members belonged to 'defined contributions plan'. In the latter plans the accumulated contributions plus investment income are used to purchase a pension at the time of retirement. In 1960 the 1.8 million RPP members comprised 34% of the labour force (i.e., those employed and those unemployed and seeking work). This compared with the 4.8 million members in 1988 who represented 41% of the labour force (Pension Plans in Canada, Statistics Canada, 1988.) Back
⁹Good Jobs, Bad Jobs, Economic Council of Canada, 1990; also Weitz, Harry, The Pension Promise; The Past and Future of Canada 's Private Pension System, 1992. About 44% of the labour force was covered by private pensions in 1978, but only 41% in 1988. Another source indicates that fewer than one out of four workers were covered by RPPs in 1990 (Frenken, Hubert, "C/QPP Costs and Private Pensions, Statistics Canada", Perspectives, Autumn 1993 Back
¹⁰Frenken, C/QPP Costs and Private Pensions, 1993 Back
¹¹The accumulated assets, however, may not accurately reflect retirement savings as such, since RRSPs can be used as a temporary tax shelter. For example, a large proportion of RRSP outflows in 1990 were cash withdrawals by non-seniors. The extent to which withdrawals by non-seniors reflects early retirement or the use of RRSPs as a temporary tax shelter is not known.

The proportion of tax-filers contributing to RRSPs increased from 2% in 1968 (some 172,200 individuals) to more than 20% in 1987 (about 3.5 million people). Frenken, Hubert, RRSPs: Tax-Assisted Retirement Savings, Perspectives in Labour & Income, Statistics Canada, Winter, 1990. Back
¹²Frenken, Hubert: "RRSPs: Tax-Assisted Retirement Savings", Perspectives on Labour and Income, Statistics Canada, Winter 1990. Back
¹³Ingerman, S., and R. Rowley, Another Look At Tax Losses And Retirement Savings, Department of Economics Working Paper, McGill University, January 1994. Back
¹⁴Loc. cit. Weitz, The Pension Promise..., 1992 Back

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