A study on the economic impact of pensions found that they contribute considerably to government coffers, prop up rural economies and help marginalized groups of workers.
For every dollar increase in pension income paid out monthly across the country, governments recoup 41 cents. That was just one of a series of findings from a report by the Canadian Centre for Policy Alternatives (CCPA) and supported by Federal Retirees.
Titled The Power of Pensions: The impact of pension income on Canada’s economy, the report underscores the critical role pension earnings play in supporting Canadian communities and the economy as a whole and provides valuable information to those who’ve always advocated for dignity in retirement.
Looking at all workplace pension plans in 2021 — including those earned by public and private-sector employees — the report found that pension earnings contributed $84 billion, representing five per cent of all income received by Canadians that year. That’s more than the Canada Pension Plan, Quebec Pension Plan and Employment Insurance contributed to the economy.
“Workplace pensions are more important than RRSP withdrawals; they’re more important than CPP; they’re more important than self-employment when it comes to income in the economy because they exceed each one of those categories in the aggregate,“ says David Macdonald, the report’s main author. “So despite the fact that RRSPs are the belle of the ball — we certainly know when the RRSP deadline is coming up — they’re not nearly as important as workplace pensions when it comes to supporting people with incomes in retirement.“
Another finding: Workplace pension income — and the resulting spending by retirees — will contribute $24.5 billion to federal revenue in 2025.
“When it comes to provincial and federal government coffers, [workplace pensions are] an extremely important support for them,“ Macdonald says. “All of this money is taxable — on income as well as on commodity taxes when they spend it in the economy, but also in terms of savings. Supporting seniors is an important part of what the federal government does and insofar as the federal government does not have to support seniors because they have a pension — that’s savings from the federal perspective.“
And that doesn’t account for the savings the federal government realizes in the health-care system — financially comfortable Canadians have better health outcomes.
Macdonald says it’s ironic that governments, which contribute to pension plans for their employees alongside those employees, see those contributions as “straight-up expenditures that they receive nothing for — as if they’ve taken that money and burned it in a hole in the ground.
Then they say they can’t ‘afford these expenditures.’ The trouble with that logic is that they put in, say, $1 and the workers match their dollar, but then that money is invested and grows for 40 years, and then the governments tax it back to 41 cents on the dollar.“
Macdonald says that when you look at that over the life cycle of the pension — not just the contributions — the returns are tremendous because most of the revenue that pension funds receive is not from contributions, it’s from stock market returns, or sale of assets at a profit.
Another key finding from the study was that pension income is an important contributor to many local economies, particularly in communities with lower-than-average employment income. The study drives this point home with an interactive map that includes 85 municipalities for which the CCPA examined what proportion of residents’ income comes from pension income. For example, the map shows that in the federal riding of Fredericton South, pension income was $87 million — considerably more than RRIF withdrawals, entrepreneurs’ income or EI and social assistance as individual categories.
Not surprisingly perhaps, the study also determined how much better the public sector is than the private sector at providing some sort of retirement plan, which in turn, means providing retirement security for more marginalized groups such as women, Indigenous groups and new Canadians.
“They're just a lot more likely to have retirement plans in the public sector than the private sector,“ he says. “There's often this argument to make the public sector more like the private sector. That would be a massive change in retirement security for everybody, and specifically for some of these key groups [whose members] historically have had a tough time in the labour market to begin with. And also, that money wouldn’t be going back into the economy.“
One finding of concern was with respect to the erosion of defined benefit plans in the private sector. Macdonald says the decline of the defined pension plan is happening in terms of raw coverage rates, but it's also happening in terms of the quality of pension plans in the private sector, even if you have one. In the 1970s, 90 per cent of the private sector’s pension plans were defined benefit. Now it’s just 40 per cent.
“This report reinforces one of our core advocacy priorities: that all Canadians deserve dignity and security in retirement,“ says Anthony Pizzino, CEO of Federal Retirees, which supported the study. “Better retirement security through pensions is not only good for workers and retirees, but also plays a crucial role in supporting the Canadian economy, government finances, local communities and equity for historically disadvantaged groups.“
Given that decline, Macdonald wonders if the CPP contributions should actually be larger among those who work in the private sector since it’s the one abandoning pension plans for its workers. That way their CPP would make up for some of the lacking private sector pensions.
“One of the ideas is that you substitute a public plan to make up for private sector plans,“ Macdonald says. “We should be pulling people up to have better retirement security.“
New Brunswick’s former premier Blaine Higgs made changes to its defined benefit pension plans for some provincial employees, including those who were already retired and collecting defined benefit pensions, converting them to shared risk plans.
Asked to comment on that, in light of the study’s findings, Macdonald says, “I think it’s worthwhile doing this kind of analysis so there’s proper understanding of where the returns are coming from, particularly for governments, on their own plans. Part of the role of this [study] is to better inform policymakers who might be thinking that contributions for their own workers is exclusively an expense that they will never get back, which is absolutely false. It is a great return insofar as they get, 40 per cent of a much bigger pot back at the end of the day.“
If governments decide to switch their plans, they’re depriving themselves of that tax revenue when the pensions kick in, and they’re also costing themselves more in Old Age Security and Guaranteed Income Supplements, Macdonald says.
“You can save money in the short term by cutting off retirement security for workers, but you’re losing out in the long run on the income you would have gained from those sources had they remained in place,“ Macdonald says.