What’s next for Canada’s retirement income system?

In the coming decade, the median retirement age could increase from 65 to 68, though the exact timing and extent of this rise can’t be predicted with complete confidence.

However, Canadians are staying in the workforce longer, so if Canada continues to pay pension benefits at age 65, it’s certain that a significant and growing portion of these payments will be supplemental to employment earnings rather than simply retirement income.

A system that aligns the age at which pensions begin to be paid with the actual age at which people leave the labour force will create savings that may be better used to pursue other objectives. The savings from old-age security benefits and the guaranteed income supplement could be allocated to raising the minimum income guarantee for the elderly, making sure the benefits keep pace with wages and not just prices, or measures beyond income support. For the Canada Pension Plan and workplace pensions, the savings could translate into lower contributions prior to retirement or higher benefits starting at a later age.

Read: Head to head: Is it time to change the retirement age?

All of this comes with one very important qualifying comment. For a segment of the population, maintaining employment until age 65 can be a problem due to low skills, poor health and permanent layoffs late in working life. There must be measures to offset the negative effect on this group of a later age of eligibility. Otherwise, there could be increased inequality in older age groups, with many lower income people forced to delay receiving retirement benefits while many higher income people will increasingly receive income from both earnings and a pension.

The age of eligibility issue was addressed in two discussion papers recently published by the Ottawa Council on Aging — “Retirement Income Policies: Reforms Pressures over the Coming Decade” by Peter Hicks and “Canada’s Retirement Income System: A Reform Agenda” by Bob Baldwin.

Future trends

“Retirement Income Policies” reviews a number of estimates for future demographic and labour force trends. Hicks notes that, while these estimates have limitations, they all point in the same direction — most Canadians will retire later.

By 2024, some 36.3 per cent of people aged 65 to 69 — past the age of entitlement to public pensions — will still be in the labour force, according to Statistics Canada. The participation figures for men and women are 38.6 per cent and 34 per cent, respectively. Many will be working full time and earning at lifetime highs while also receiving a pension.

The paper also reviews the income situation of the current elderly in relation to the retirement income system’s two main objectives: limiting poverty and facilitating people moving from work to retirement without experiencing a serious decline in their standard of living. Generally speaking, Hicks finds both objectives are being met for most, but not all, of Canada’s population currently aged 65 and over. But the general situation doesn’t bring all relevant issues into view.

Read: Employers challenged by trend towards delayed retirement

Retirement around
the world

  • In 2016, the Organisation for Economic Co-operation and Development’s average normal retirement age was equal to 64.3 years for men and 63.7 years for women for an individual retiring that year and assuming labour market entry at age 20. By 2060, this average age is projected to rise to 65.8 years for men and 65.5 years for women.
  • In the 1970s, women in OECD countries were expected to spend 14.7 years in retirement, compared to 10.8 years for men. Today, those numbers are 22.5 years and 18.1 years, respectively.
  • 18 high-income OECD countries are increasing the age of eligibility under their public pension systems, with 13 of these boosting it to at least age 67.
  • 5 countries, including Denmark, Italy and the Netherlands, are indexing their age of eligibility to life expectancy.

With respect to older people living in poverty, the Canadian government uses a market basket measure, which measures low income based on the cost of a specific basket of goods and services representing a modest, basic standard of living. By this measure, poverty has been in a state of continual decline and now amounts to a very low 3.9 per cent.

Internationally, it’s more common to use a low income measure of poverty, which is a relative measure: an after-tax income of less than half of median income is indicative of poverty. By this measure, poverty has fallen since the mid-1970s but has increased in the recent past, with incomes of the non-elderly growing faster than incomes of the low-income elderly. By the low-income measure, the poverty rate among older Canadians has risen from roughly five per cent to more than 15 per cent over the period from the mid-1990s to 2017.

Hicks also notes that research on the degree to which people are able to replace their pre-retirement earnings is a decade old, and shows most middle earners had incomes that were at least 60 per cent of their pre-retirement earnings. However, 20 per cent of incomes were below the 60 per cent threshold. The research also confirmed the inverse relationship between the level of pre-retirement earnings and the portion of these earnings that are replaced.

Read: 90% of Canadians would pay more for predictable retirement income: survey

The paper references attempts to assess the degree to which the future elderly will be able to maintain their standard of living in retirement, and notes these are less optimistic for the future elderly compared to the current elderly.

In this respect, problems arise from several sources: the declining rate of participation in workplace pension plans; the move from defined benefit to defined contribution; the likely decline in the value of OAS/GIS benefits, compared to wage and salary growth; and a prolonged period of low interest rates.

Challenges for workplace pensions

While Baldwin’s paper complements Hicks’ paper, it has a different focal point. It takes for granted the likelihood of change in the retirement income system driven by labour market and demographic changes, anticipates changes in the components of the system and adds a discussion of the future problems faced by workplace pension plans.

The paper discusses components of both public and private programs. With respect to the public components of the retirement income system, Baldwin raises several concerns, including the following: Given the increasing range of labour force entry and exit ages, should the emphasis on chronological age as an eligibility condition for benefits be reduced? Can we find ways to reduce the disincentives to save for retirement and to take employment after retirement that result from overlapping tax and tax-back rates faced by people with low incomes? Should OAS and GIS benefits continue to be adjusted in line with prices or should they keep pace with the growth in average wages and salaries?

Read: Holistic retirement thinking: Integrating public, private pensions

It also considers whether any further enhancement to CPP should apply to the existing contributory earnings base or if alternatives should be considered, such as: an enhancement that would apply only at half average wage and salaries and above; an enhancement that would only apply to people who don’t belong to a workplace pension plan that meets specific criteria; and an enhancement that only begins at age 75.

With regard to workplace pension plans, Baldwin argues that both the regulatory regime and the tax rules need to be reviewed to facilitate innovative plan designs that combine elements of DB and DC plans.

The regulatory regime should also be revised so plans that are jointly governed by plan member and employer representatives face a more principles-based, or objective-based, set of rules. On the tax side, an analysis of the distributional impact of the current rules is required. Also, he suggests that the tax rules be regularly reviewed, since the impact of the rules will change with time alongside changes in the socio-economic and financial environment.

Common themes

The need for improvement in the governance of the retirement income system — using the term “governance” in a broad sense — is a common theme articulated in both papers.

The system is complicated. It has many component parts that interact with each other and with the tax system. Change in one component will typically have an impact on others and, in some cases, interactions will limit the impact of change. For instance, low earners will get little benefit from the recent CPP enhancements due to interactions with GIS and provincial supplements where they exist. The reality of this complexity calls for a high degree of policy and research co-ordination both within and between levels of government.

The fact that the retirement income system’s outcomes and its component parts are constantly changing in response to the evolving environment in which they operate also means the system has to be viewed as a policy file that’s always open.

Read: A primer on the incoming CPP/QPP enhancements

In order to deal with the file effectively, gaps in data need to be closed and life has to be breathed back into longitudinal micro-simulation modelling capacity, which the government has recently indicated it’s willing to develop.


In 2024, 36.3% of Canadians between ages 65 and 69 will still be in the labour force.

The number of workers aged 55 and older rose by 128,000 in October 2016 compared to the previous year.

Source: Statistics Canada

In addition to building technical capacity and co-ordination within government, a more fulsome and open engagement with stakeholders is required. The authors recommend that regular assessments of the income situations of the current and future elderly serve as the basis for public consultation efforts every several years. A revived micro-simulation modelling capacity can provide key elements for this consultation process.

Alongside ongoing assessments, Hicks’ paper also considers the possibility that a comprehensive review and consultation of the whole retirement income system may soon be required in order to take account of the far-reaching consequences of the trend towards delayed retirement.

Baldwin and Hicks both acknowledge that Canada’s retirement income system has performed well for most of the current elderly. But perfection hasn’t been achieved and an ever-changing environment will produce ever-changing outcomes in terms of both costs and benefits.

Read: How does Canada’s public pension system measure up globally?

Current success doesn’t guarantee future success, and a growing portion of the population will be impacted directly by the outcomes. Effectively managing change to the retirement income system is of the utmost importance.

Bob Baldwin, a pension consultant, and Peter Hicks, a social policy consultant, are both members of the Ottawa Council on Aging’s expert panel on income security.