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Pensions in Canada can be public, private, and collective, or come from individual savings.
The Canada Pension Plan (CPP) forms the backbone of Canada's national retirement income system. All those employed aged 18 or older (and their employers) must contribute a portion of their income (matched by their employers) into the CPP or, for Quebec residents, the Quebec Pension Plan (QPP). In all provinces and territories except Quebec, these plans are administered by Employment and Social Development Canada, while QPP is administered separately by the Quebec government.
The Canada Pension Plan Investment Board (CPPIB) is a Canadian Crown corporation established by way of the 1997 Canada Pension Plan Investment Board Act to oversee and invest the funds contributed to and held by the CPP. As of December 31, 2022, the CPP Investment Board manages over C$536 billion in assets under management for the Canada Pension Plan on behalf of 21 million Canadians [1] and is one of the world's largest investors in private equity. [2]
Upon retiring, a CPP contributor receives the base regular pension payments equal to 25% (in phases increasing to 40%) of the earnings on which contributions were made over the entire working life of a contributor from age 18 in constant dollars, as well as the first additional component phase (2019–2023) and the second additional component phase (2024–2025). [3] [4] Annual Cost-of-Living Adjustment (COLA) increases are made to the monthly payments according to the Consumer Price Index.
Although one can claim a CPP pension as early as age 60 rather than the typical retirement age of 65, those who claim it at 60 have their pension reduced by 36%. Retirees can also elect to delay their CPP claim up until age 70 to increase their monthly retirement income. [3]
Both Quebec and Saskatchewan have their own provincial plans. They are the Quebec Pension Plan (QPP) and the Saskatchewan Pension Plan (SPP), where QPP is a mandatory pension plan for residents of Quebec. Both have different contribution and retirement income rates compared to the CPP.
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individuals save for retirement by allowing them to contribute pre-tax income, which then grows tax-free until it is withdrawn.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) 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, whether or not they require financial assistance (being automatically reduced to zero above specified income thresholds).
The Guaranteed Income Supplement (GIS) is a supplement to the OAS payment for very low-income and at-risk seniors. The amount of GIS payment depends on the senior's income, marital status, and whether they live alone or with a partner. Paid directly from general tax revenue, the two programs do not have dedicated investment funds like the CPP or QPP.
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. [5] 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. [6]
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. [6]
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. [6] 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.
Despite opinion pieces claiming the imminent demise of DB plans in Canada, [7] Statistics Canada information verifies only a slight decline in the number of plans over the most recently available five-year period (9,304 in 2017 to 9,022 in 2021 – a 3.13% reduction). [8] Additionally, considering an increase of 213,518 active members in the same time frame (2017–2021), no data is included regarding what percentage of the declining number of DB plans is due to the increasing industry norm of plan mergers and consolidation. The 4,425,506 active members as of 2021 is a mere 1.8% decrease from the historic high of 4,505,601 active members in 2005 (when there were only 7,561 such plans). [8]
It is important to note that DB plans remain the additional (after mandatory CPP or QPP) retirement income of choice for the Canadian public sector based on all data. Primary reasons include that with DB plans, regardless of investment returns, the plan sponsors are responsible for ensuring that the promised benefits are paid out, they provide guaranteed retirement security for life, and such plans lessen strain on government social programs. [7]
Canada's pension plans exhibit 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. [9] The aim of the strategy employed in the country is muting volatility and focusing on long-term returns and benefits security. [9]
The in-house management style stands in stark contrast to the Yale Model popularized by David Swensen in the United States, [9] 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. [10] This strategy comes with the dual benefit of greater control over investment and cost-reduction from streamlined organizational costs, according to Canadian proponents. [11]
During the Great Recession this model was a beneficial hedging mechanism, as Canada's pension system saw smaller, though still marked, losses than nearly all American and European funds. [12] However, the Bank of Canada has noted that the low-interest rate environment leftover from the various financial crises has driven Canadian pensions into more complex and more illiquid investment strategies, necessitating more attention to risk management in the future. [13]
{{cite book}}: |website= ignored (help)In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers. 401(k) payable is a general ledger account that contains the amount of 401(k) plan pension payments that an employer has an obligation to remit to a pension plan administrator. This account is classified as a payroll liability, since the amount owed should be paid within one year.
A pension is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work. A pension may be:
A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income.
The Canada Pension Plan is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old Age Security (OAS). Other parts of Canada's retirement system are private pensions, either employer-sponsored or from tax-deferred individual savings. As of Jun 30, 2022, the CPP Investment Board manages over C$523 billion in investment assets for the Canada Pension Plan on behalf of 21 million Canadians. CPPIB is one of the world's biggest pension funds.
An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's earned income for the taxpayer's eventual benefit in old age. An individual retirement account is a type of individual retirement arrangement as described in IRS Publication 590, Individual Retirement Arrangements (IRAs). Other arrangements include employer-established benefit trusts and individual retirement annuities, by which a taxpayer purchases an annuity contract or an endowment contract from a life insurance company.
A registered retirement savings plan (RRSP), or retirement savings plan (RSP), is a type of financial account in Canada for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).
Superannuation in Australia or "super" is a savings system for workplace pensions in retirement. It involves money earned by an employee being placed into an investment fund to be made legally available to fund members upon retirement. Employers make compulsory payments to these funds at a proportion of their employee's wages. From July 2023, the mandatory minimum "guarantee" contribution is 11%, rising to 12% from 2025. The superannuation guarantee was introduced by the Hawke government to promote self-funded retirement savings, reducing reliance on a publicly funded pension system. Legislation to support the introduction of the superannuation guarantee was passed by the Keating Government in 1992.
A registered retirement income fund (RRIF) is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their registered retirement savings plan. As with an RRSP, an RRIF account is registered with the Canada Revenue Agency.
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.
Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending March 31, 2018, the federal government collected just over three times more revenue from personal income taxes than it did from corporate income taxes.
Pensions in the United States consist of the Social Security system, public employees retirement systems, as well as various private pension plans offered by employers, insurance companies, and unions.
A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private pension after retirement. It is an alternative to the state pension. Usually, individuals invest funds into saving schemes or mutual funds, run by insurance companies. Often private pensions are also run by the employer and are called occupational pensions. The contributions into private pension schemes are usually tax-deductible. This is similar to the regular pension.
An individual pension plan or IPP is a Canadian retirement savings vehicle. An IPP is a one-person maximum defined benefit pension plan which allows the plan member to accrue retirement income on a tax-deferred basis. As such, an IPP must conform to the Canadian Income Tax Act (ITA) and regulations (ITR) as well as the requirements of the Canada Revenue Agency (CRA) with respect to defined benefit pension plans. It is possible for an IPP to be a combination plan offering both defined benefits and defined contribution pensions
Retirement compensation arrangements (RCAs) are defined under subsection 248(1) of the Canadian Income Tax Act, which allows 100 per cent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the "entitlement" under the "generally accepted guidelines" for pensions, which are:
A tax-free savings account is an account available in Canada that provides tax benefits for saving. Investment income, including capital gains and dividends, earned in a TFSA is not taxed in most cases, even when withdrawn. Contributions to a TFSA are not deductible for income tax purposes, unlike contributions to a registered retirement savings plan (RRSP).
A Personal Retirement Savings Account (PRSA) is a type of savings account introduced to the Irish market in 2003. In an attempt to increase pension coverage, the Pensions Board introduced a retirement savings account, that would entice the lower paid and self-employed to start making some pension provision. The intention was for PRSAs to supplement any State Retirement Benefits that would be payable in years to come.
The Saskatchewan Pension Plan (SPP) is a voluntary defined contribution pension plan created by the Government of Saskatchewan. The SPP was created through The Saskatchewan Pension Plan Act. Oversight of the plan rests with the Saskatchewan Pension Plan Board of Trustees. The plan is also open to both residents of Saskatchewan and other provinces. Saskatchewan is the only province in Canada that operates a voluntary pension plan of this nature. The plan has assets of $700 million and over 32,000 members. The maximum annual individual contribution is $7,000, indexed annually according to the change in the Year's Maximum Pensionable Earnings.
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provide defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
