Public Pensions in a Development Context: The Case of Canada
22 Feb 2007
In Canada, as in other countries around the world, the pension system must adapt to the realities of an ageing society. Until now, the Canadian system has been effective in fulfilling its two primary objectives: ensuring a minimum income for the elderly and assisting seniors to maintain pre-retirement living standards after retirement. Whether the Canadian pension system will be able to continue to meet these objectives in the coming decades will depend largely on how well it responds to the economic and social challenges of population ageing.
This paper starts by describing the Canadian pension system, which consists of a mix of public and private elements. It then focuses on the reforms made to the public parts of the system in recent years. In particular, the paper examines the ground-breaking changes to the financing of the Canada Pension Plan, a publicly administered, mandatory social insurance programme. The paper concludes with some of the lessons learned from Canada’s experience that are relevant for both developing and developed countries seeking to adapt their pension systems to the challenges posed by population ageing.
In the mid-1990s, public policy attention in Canada turned to the financing of the Canada Pension Plan. This plan, which began in 1966, was originally designed as a pay-as-you-go, defined-benefit scheme with a small reserve fund equal to two-years’ costs (benefits and administrative charges). By 1995 it had become apparent that the plan, unless reformed, would become very costly for future cohorts of workers—more costly, in fact, than what the future workers would otherwise have to pay for comparable pensions.
After an extensive consultation process, a proposal emerged for the reform of the Canada Pension Plan. The proposal consisted of a package of measures centering on the financing of the plan, but also including some small reductions to benefits. The financing reforms were made up of four parts: Rapidly increasing the plan’s contribution rate over a period of seven years, building up a substantial fund, adopting a new investment policy that allows the plan’s fund to be invested in a wide range of asset classes, and establishing an independent agency
The paper concludes that drastic changes to benefits—for example, severe reductions in retirement pensions or increases in the retirement age—or the wholesale replacement of public defined-benefit programmes by privately administered defined-contribution schemes are not necessarily the only alternatives for preparing pension systems for population ageing. Through reforms that are carefully thought out and planned, existing programmes can be made sustainable at a reasonable cost.
Ken Battle is president of the Caledon Institute of Social Policy, a think-tank based in Ottawa, Canada.
Edward Tamagno is a policy associate with the Caledon Institute of Social Policy.
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