HRSDC-IC-SSHRC Skills Research Initiative

Working Paper Series

Public Pensions and Retirement: International Evidence in the Canadian Context
by Kevin Milligan and Tammy Schirle.

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Abstract

This paper examines evidence on the impact of Canada’s public pensions on the retirement decisions of the elderly. Public pensions may affect a person’s labour market decisions in one of two ways. First, a wealth effect exists when public pensions increase a person’s total lifetime income, inducing the person to spend fewer years in the labour market and retire at an earlier age. Second, an accrual effect may exist if the discounted present value of future pension flows depends on the date of retirement. If so, then the rate of accrual of rights to future pension income may affect the timing of retirement. Through descriptions and simulations, we document the components of Canada’s income security system and show how they act independently and in concert to change the incentives to retire. The major contributing factors are: 1. The actuarial adjustment of the Canada/Quebec Pension Plan does not sufficiently compensate for the foregone year of pension receipt, 2. The Guaranteed Income Supplement exacerbates the insufficiency of the actuarial adjustment, 3. For workers 65 and over, the Guaranteed Income Supplement decreases the return to work significantly, 4. Married couples have different incentives because changes in pension entitlements are echoed in survivor benefits, 5. Women have different incentives because they have a different mortality curve and because they are less likely to predecease a spouse. To best place the importance of labour market disincentives on actual retirement behaviour in context, the paper provides a thorough survey and critical review of the international evidence on public pensions and retirement. Through nearly thirty years of research across many countries and dozens of studies, the broad weight of the evidence suggests that the structure of public pensions contributes to the decision to retire. These findings are corroborated in studies of the retirement behaviour of Canadians. The paper concludes with three major findings: 1. The Canadian retirement income security system generates work disincentives, although they are small relative to many European countries, 2. International evidence suggests that work disincentives influence the decision to retire, and 3. The disincentives and the reaction to them are strongest among low-income Canadian seniors.