Pensions in Canada

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Pensions in Canada can be public, private, and collective, or come from individual savings.

Pension plans[edit]

Canada Pension Plan (CPP)[edit]

The Canada Pension Plan (CPP) forms the basic state pension system. All those employed aged 18 or older must contribute a portion of their income to a pension plan. In all provinces and territories except Quebec, these plans are administered by Employment and Social Development Canada, while Quebec administers them separately with the Quebec Pension Plan (QPP). Upon retiring, a contributor receives regular CPP pension payments equal to 25% of the earnings on which CPP contributions were made over the entire working life of a contributor from age 18 in constant dollars.[1] Adjustments are made according to the Consumer Price Index. Although one can claim a CPP pension at age 60 rather than the typical retirement age of 65, as of 2016, those who claim it at 60 have their pension reduced by 36%.[2]

Provincial Pension Plans[edit]

Both Quebec and Saskatchewan have their own plans. They are Quebec Pension Plan (QPP) and the Saskatchewan Pension Plan (SPP). They have different contribution plans and different rates compared to CPP. QPP is a mandatory pension plan for residents of Quebec.

Registered Retirement Savings Plan (RRSP)[edit]

A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings account available to Canadians. The purpose of an RRSP is to help individuals save for retirement by allowing them to contribute pre-tax income, which then grows tax-free until it is withdrawn.

The amount that an individual can contribute to an RRSP each year is based on their earned income, up to a certain limit. Contributions to an RRSP are tax-deductible, which means that they reduce an individual's taxable income for the year in which they are made. This can result in a reduction in the amount of tax that the individual owes. Any investment income earned within an RRSP is not subject to tax until it is withdrawn.

Pensioners can start withdrawing funds from their RRSP at any time, but withdrawals are subject to income tax. The amount of tax that must be paid depends on the individual's income level at the time of withdrawal. The minimum age for withdrawing funds from an RRSP without penalty is 71, at which point the account must be converted into a Registered Retirement Income Fund (RRIF) or used to purchase an annuity.When funds are withdrawn from an RRSP, they are added to the individual's taxable income for the year, and are subject to tax at the individual's marginal tax rate. For this reason, it is often advisable to withdraw funds from an RRSP in a tax-efficient manner, for example by spreading withdrawals over multiple years.

Overall, RRSPs are a popular and effective way for Canadians to save for retirement. By offering tax advantages for contributions and investment income, RRSPs encourage individuals to save for the future and provide a valuable source of income in retirement.

Old Age Security (OAS) and Guaranteed Income Supplement (GIS)[edit]

Old Age Security (OAS) is a monthly payment available to Canadians aged 65 or older who meet certain residency requirements. The amount of OAS payment depends on how long the applicant has lived in Canada after the age of 18. Guaranteed Income Supplement (GIS), on the other hand, is a supplement to the OAS payment for low-income seniors. The amount of GIS payment depends on the senior's income, marital status, and whether they live alone or with a spouse.

They both are federal government programs aimed at providing financial assistance to seniors and does not have a dedicated fund like CPP and are paid directly from tax dollars, beneficiaries of these programs doesn't need to contribute to it for receiving it. It is considered as a burden to taxpayers, and as the population ages and the number of seniors receiving OAS and GIS increases, the cost of these programs rise as Canada's population ages, putting pressure on the government's finances. An article argues that the government should have outreach programs that addresses the issue of seniors living in poverty, which is a growing concern in Canada.[3]

Private Pension Plans[edit]

In addition to the public pension system, some employers maintain private pension plans for their employees, they usually boost retirement savings. They are retirement savings plans that are sponsored by employers, unions, or other organizations. They are also known as defined benefit or defined contribution plans. Investments into these plans are not subjected to taxation until retirement.[4] Private pension plans are subjected to various regulations among the provinces and territories, and must be registered with the authorities.

Defined benefit plans guarantee a specific retirement benefit to plan members, based on a formula that takes into account factors such as the member's years of service and earnings history. These plans are typically funded by contributions from both the employer and the employee, and are managed by professional investment managers. The risks and benefits of a defined benefit plan are largely borne by the employer, who is responsible for ensuring that the plan is adequately funded to meet its obligations.[5]

Defined contribution plans, on the other hand, do not guarantee a specific retirement benefit. Instead, plan members contribute a portion of their income into the plan, and the contributions are invested in a portfolio of assets chosen by the plan sponsor. The ultimate value of the plan depends on the performance of the investments, and the risks and benefits are borne by the plan member.[5]

Private pension plans often are risky. Defined benefit plans can be vulnerable to under-funding if the plan sponsor does not contribute enough to cover the promised benefits. If a plan is underfunded, plan members may receive reduced benefits or may even lose their benefits entirely if the plan sponsor becomes insolvent. Defined contribution plans, on the other hand, are subject to investment risk, which means that the ultimate value of the plan may be lower than expected if the investments perform poorly. Hence, it is important for plan members to monitor the plan's performance and funding status over time.[5]

The age at which plan members can start drawing money from a private pension plan depends on the terms of the plan. Generally, members must be retired or have reached a certain age (typically 55 or 60) in order to start receiving pension payments. Plan members may also be able to withdraw funds from their plan before retirement in certain circumstances, such as financial hardship or disability, but these withdrawals are typically subject to taxes and penalties.

Decline of Defined Benefit Plans[edit]

In 2014, Statistics Canada published results of a study regarding pension coverage in Canada according to citizens under defined benefit (DB) plans versus defined contribution (DC) plans.[6] The study found that in the period 1977–2011, the proportion of the overall employed population covered by registered pension plans (RPPs) decreased approximately 15% (from 52% to 37%) among men due mainly to a decline in DB plan coverage.[7] For women, RPP coverage actually increased 4% in the period.[8] The number of private sector DB plans are declining at fast rate in Canada. There is an increase in popularity of DC and hybrid plans because of the rise of gig-economy and the flexibility it provides. If the trend continues to decline at such a rate, Canada is likely to see the death of private sector DB plans by the year 2026.[9] However, it is important to note that DB plans remain the plan of choice for the Public sector in Canada based on Statistics Canada data. Because with DB plans, regardless of investment returns, the government is responsible for ensuring that the promised benefits are paid out, and it provides retirement security and lessens strain on government social programs.[10]

Canadian Pension Management Model[edit]

Canada's pensions are marked by marked differences from contemporary American and European plans, in what has been broadly termed "The Canadian Model". Primary characteristics of the model include governance that is insulated from political pressures, a focus on illiquid, alternative asset classes like infrastructure and real estate, and a strong preference for in-house management of investments and direct investment.[11] The aim of the strategy employed in the country is muting volatility and focusing on long-term returns.[12]

The in-house management style stands in stark contrast to the Yale Model popularized by David Swensen in the United States,[13] while maintaining a similar focus on illiquid asset classes in search of market inefficiencies. According to a 2013 Boston Consulting Group study, over 75% of assets in the top 10 largest pension funds in Canada were managed by internal staff.[14] This strategy comes with the dual benefit of greater control over investment and cost-reduction from streamlined organizational costs, according to Canadian proponents.[15]

During the Great Recession this model appeared to be a beneficial hedging mechanism, as Canada's pension system saw smaller, though still marked, losses than many American and European funds.[16]

However, this model has been criticized for its talent acquisition given the salaries required to attract top investment talent to the public sector entities rather than the lucrative private asset management industry and the large teams necessary to oversee the niche asset classes preferred by Canadian pensions.[17]

Additionally, the Bank of Canada has voiced concerns that overzealous pursuit of illiquid asset classes and over-leveraging through repo and derivatives markets by the largest eight Canadian pensions has led to a potentially dangerous situation should significant financial stress akin to 2008 resurface.[18] The Bank noted that the low-interest rate environment leftover from the financial crisis has driven Canadian pensions into more complex and more illiquid investment strategies, necessitating more attention to risk management in the future.[19]

See also[edit]


  1. ^ Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E.
  2. ^ Service Canada. Canada Pension Plan Retirement Pension (booklet - March 2014), ISPB-147-03-14E
  3. ^ "Old Age Security costs more every year. The Trudeau government's budget is making it worse". The Globe and Mail. 2021-04-29. Retrieved 2023-05-05.
  4. ^ "Financial Consumer Agency of Canada". 28 September 2020.
  5. ^ a b c Kim, Hyun-Joo (2005). Morneau Sobeco handbook of Canadian pension and benefit plans. CCH Canadian Limited. pp. 33+. ISBN 978-1-55367-961-5.
  6. ^ Statistics Canada (
  7. ^ Statistics Canada (
  8. ^ Statistics Canada (
  9. ^ The Globe and Mail (2018) (
  10. ^ Vettese, Frederick (2018-10-04). "The extinction of defined-benefit pension plans is almost upon us". The Globe and Mail. Retrieved 2023-05-06.
  11. ^ Rozanov, A. (2015). Public pension fund management: best practice and international experience. Asian Economic Policy Review, 10(2), 275-295.
  12. ^ ibid
  13. ^ ibid
  14. ^ Boston Consulting Group (2013), “Measuring the Impact.”
  15. ^ Nanji, Mahmood et al.(2017) The Evolution of the Canadian Pension Model: Practical Lessons for Building World-class Pension Organizations. The World Bank Group. Washington, D.C.
  16. ^ OECD. (2009). Pensions at a Glance 2009. Retirement-income systems in OECD countries.
  17. ^ Williams. Jonathan (2016, April 15) "Pay at Canadian pension managers 'completely, utterly unacceptable'" Investments and Pensions Europe. Retrieved:
  18. ^ Bédard-Pagé, G., Demers, A., Tuer, E., & Tremblay, M. (2016). Large Canadian public pension funds: A financial system perspective. Bank of Canada Financial System Review, 33-38.
  19. ^ ibid