Making it Pay to Work: Improving the Work Incentives in Canada's Public Pension System Kevin Milligan ~ Vancouver School of Economics ~ University of British Columbia

Making it Pay to Work: Improving the Work Incentives in Canada's Public Pension System

Commentary 218, C.D. Howe Institute, October, 2005.
Google Scholar entry.


While income-security arrangements for older Canadians have greatly reduced poverty among their recipients, the means-testing provisions of many of these programs reduce the rewards from work and saving for many seniors and near-seniors. One acute problem arises from the interaction of the rewards the Canada and Quebec Pension Plans (CPP/QPP) provide for later retirement, and the clawback provisions of the Guaranteed Income Supplement (GIS).

CPP/QPP retirement benefits are 0.5 percent higher for each month the recipient delays commencement, and 0.5 percent lower for each month the recipient brings it forward. This provision aims to reward later retirement. But the GIS, which operates outside the tax system, reduces its benefit by 50 cents for every dollar of outside income (other than Old Age Security). This provision aims to target the benefit to those most in need. By adding a 50-percent clawback to other taxes recipients face, however, the GIS makes longer working life much less rewarding for modest-income Canadians.

While the impact of high taxes on work effort generally is a matter of debate, the net effect of the GIS clawback is likely to induce older workers to retire earlier. The clawback of the GIS with higher CPP/QPP payments and earnings can account for a reduction of as much as 11 percent of potential work between the ages of 60-69 for some groups of Canadians. Those affected are, by definition, at the lower end of the income scale - people for whom a few more years of work would provide a welcome boost to their standard of living in retirement.

One solution to this problem would be to shelter the actuarial adjustment in CPP/QPP payments from the GIS clawback. The calculation of income for the GIS clawback could, for example, assume that the recipients CPP/QPP income was whatever the recipient would have been entitled to had he or she commenced receipt at age 60. This solution would reward work better and also ensure that no one receives lower GIS payments under the reform.

Published Version, October 2005: PDF.

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