Is Canada’s pension system world class?

With the Canada Pension Plan on many people’s minds, how does Canada’s public pension system compare to those of other countries? In light of the debate over the CPP and old-age security, Benefits Canada takes a look at how Canada’s system stacks up against other countries around the world.

The Mercer Melbourne Global Pension Index ranks Canada’s retirement income system seventh out of 25 countries. Another global report, published in December 2015 by the Organisation for Economic Co-operation and Development, reviews and analyses the pension measures enacted or legislated in OECD member countries between September 2013 and September 2015.

It’s difficult to draw comparisons as many countries on the list — such as Australia, Britain, China, Denmark, France and Iceland — have mandatory employer-provided pensions. “Our problem is lack of workplace pension plan coverage in the private sector, which we are the process of addressing. . . . We just haven’t quite figured out how yet,” says Keith Ambachtsheer, president of KPA Advisory Services Ltd.

For that reason, the comparison below will focus solely on the public pension systems. In Canada, that covers the Canada Pension Plan, old-age security and the guaranteed income supplement for low-income pensioners, all three of which have recently changed – or will soon potentially change – due to legislation. Finance ministers meet this month to discuss CPP reform; the GIS benefit top-up increases by up to $947 as of July 1; and the Liberal government has confirmed it will restore OAS age to 65.

“In restoring the OAS eligibility age to 65, we are probably doing the right thing for the wrong reason,” says Malcolm Hamilton, a pension consultant and senior fellow at C.D. Howe Institute. “There was no economic justification for changing it from 65 to 67 in the first place.”

The good news about the CPP is it has the potential to reach everybody, says Ottawa-based pension consultant Bob Baldwin. “Virtually all of the employed and self-employed participate in the program, and you’ve got a reasonably efficient administrative apparatus that is already in place. That’s the good news.”

Before diving into 12 individual countries, including Canada, here are a few facts to consider:

• Across OECD countries, the average retirement age will increase to 65.5 by 2060 from 64 in 2014 on the basis of legislation as of 2015.
• Employees stay the longest in the labour market in Iceland, Japan, Korea and Mexico. In Belgium and France, men retire the earliest, while it’s women who do so in Poland and Slovenia.
• Future net-replacement rates from mandatory pensions for a full-career, average-wage worker are an average of 63 per cent in OECD countries. They range from 27 per cent in Mexico to 111 per cent in Turkey.

So, how does Canada measure up against other industrialized countries?

CANADA

How does it work? Canada’s public pension system offers a flat-rate benefit that can be topped up with an income-tested benefit (the guaranteed income supplement) and earnings-related public schemes (the Canada Pension Plan and the Quebec Pension Plan).

Age of eligibility: Under the former Conservative government, the age of eligibility for the basic OAS pension was to gradually increase to age 67, starting in April 2023, but Prime Minister Justin Trudeau’s first federal budget confirmed it would restore it to 65. For the Canada Pension Plan, the normal eligibility age is 65, but people can take an early pension from age 60 or a late one up to age 70.

Benefit calculation: Based on April to June 2016 monthly rates, the maximum annual OAS pension benefit for an individual is $6,846.24. The maximum annual GIS benefit is currently $9,283.20 (the amount will increase on July 1 to $10,230.20). So a single senior with no income outside of OAS and GIS benefits (such as CPP) would receive a combined $16,129.44 under the current amounts.

The maximum CPP payment amount for 2016 is $13,110. According to Finance Canada, it’s possible for an individual with the maximum CPP benefit to qualify for GIS payments as well. A senior could receive OAS, GIS and CPP benefits, but it’s not possible to receive the maximum of each of them since higher CPP payments directly reduce GIS amounts.

AUSTRALIA

How does it work? Australia’s public retirement system involves a means-tested age pension funded through general taxation.

Age of eligibility: The pension is payable from age 65. From July 1, 2017, the pension age will increase by six months every two years until it reaches 67 by July 1, 2023.

Benefit calculation: In March 2014, the maximum single rate of pension was equal to an annual entitlement of 21,570 Australian dollars (currently equal to $20,316.63*).

BRITAIN

How does it work? Before April 6, 2016, Britain’s public pension system had two tiers: a flat-rate basic pension and an earnings-related one. The new state pension introduces a flat-rate pension based only on national insurance contributions.

Age of eligibility: The state pension age is currently 65 for men and 63 for women. The pension age for women is gradually rising to 65 by November 2018. The government has also legislated increases in the state pension age to 66 by October 2020 and to 67 between 2026 and 2028.

Benefit calculation: The full rate for the new state pension is 155.65 pounds per week, which works out to about 8,000 pounds a year ($14,585.51). The additional earnings-related pension, which can reach almost 200 pounds a week and depends on national insurance contributions, is still available for people who reached the state pension age before April 6, 2016.

CHINA

How does it work? China has a basic public pension.

Age of eligibility: The normal pension age is 60 for all men, 50 for blue-collar women and 55 for white-collar women. The government has said it will begin to gradually increase the normal pension age in 2017.

Benefit calculation: The basic pension pays one per cent of the average of the indexed individual wage and the province-wide average earnings for each year of coverage, subject to a minimum of 15 years of contributions. The program includes indexing according to a mix of wages and prices, which has been about 10 per cent in recent years.

(This summary is from the OECD report and was not updated by sources in China.)

DENMARK

How does it work? Denmark’s public retirement system consists of a basic scheme and a means-tested supplementary pension benefit.

Age of eligibility: The normal pension age is currently 65 for men and 67 for women. The government will gradually increase it to 67 for all individuals between 2019 to 2022.

Benefit calculation: The full basic pension amount is 6,063 krone per month or 72,756 krone ($14,054.44) per year.

Read the rest at BenefitsCanada.com.

* All currency conversions to Canadian dollars based on current rates on June 10.