Wednesday, October 14, 2009

Social Pensions

The World Bank recently published an analysis of demographic and pension coverage throughout the world in a book called called "Closing the Gap". While focused mainly on underdeveloped and developing countries, the book devotes a chapter to social pensions in the 30 member countries of the OECD - these are the high income countries.

Some of the key indicators of the OECD countries include:
  • an older population structure than the rest of the world,
  • relatively high life expectancy (at birth, age 75 for boys, age 81 for girls),
  • the male/female gap in life expectancy has persisted,
  • 90% of the labor force contributes to the compulsory pension scheme,
  • most OECD countries have a system of credits that enable coverage for those outside the labor force - unemployed, working-age students, people caring for children and older family members, and
  • the countries usually have some kind of floor for old-age income.
Compared to the OECD averages, Canada has a slightly younger population, longer life expectancy for both men and women, a narrower life expectancy gap, and slightly better labor force coverage of its programs.

The chart below shows the taxonomy of the pension systems. The World Bank analysis focuses on the first and second tiers, which are the mandatory components. In Canada, the first tier includes the OAS (basic) and GIS (resource-tested), and the second tier includes the CPP and QPP (public - defined benefit).

The first tier programs are called "social pensions". These pensions are worth, on average across OECD countries, about 29% of national average earnings. About 18 countries are bunched around this average, providing social pensions worth 25% to 35% of average earnings. Canada's first tier programs are worth about 31% of average earnings.

A number of the OECD countries made major changes in recent years to their social pensions. These changes tended increase the linkage to earnings for average earners, while increasing benefits for low earners. However, some former communist countries abolished their minimum pensions, in the belief that this would help to reduce labor market distortions. These changes place more emphasis on second tier pensions.

Compared to the other OECD countries, Canada places more emphasis on first tier benefits than most. All of the G8 countries, except the UK, place a greater emphasis on earnings related pensions. This may argue that, if Canada were to change its social pensions, its starting point should be a review of the CPP and QPP benefits, rather than the benefits provided by other programs. For example, is Canada competitive in the coverage of those who are not in the workplace? Should more be done for those caring for children and older family members? Should a mandatory program be introduced to cover employees who do not have an employer sponsored plan?

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