Pension Incomes Benefit The Entire Economy

A recent report from the Canadian Centre for Policy Alternatives provides new evidence of the importance of pensions. The Power Of Pensions: The Impact of Pension Income On Canada’s Economy demonstrates not only the income security pensions provide to retired workers but also the broader economic benefits secure retirements bring to the economy overall. It has understandably been welcomed by organizations representing retirees.

The report, authored by economist David Macdonald, finds evidence that pensions contribute to the national and local economies by stimulating demand and ensuring workers remain able to provide for themselves and their families in retirement; aid government coffers through income taxes paid on pension earnings as well as other consumption based taxes; and equalize retirement security for equity-seeking groups.

In 2023, 6.9 million working Canadians, or 34 per cent of all employed people, were covered by a registered pension plan. In 2021, workplace pension plans issued roughly $84 billion in payments. These pension payments accounted for 5 per cent of all income received by Canadians. Unsurprisingly, public sector pensions accounted for 63 per cent of these payments, totalling $53 billion.

Moreover, despite the decline in private sector pension coverage, workplace pension income (which include those in the public sector) remained larger than all other private retirement income, such as Registered Retirement Savings Plans (RRSPs). It was also larger than all Canada Pension Plan/Quebec Pension Plan (CPP/QPP) income and Employment Insurance (EI) income. Even though the CPP/QPP is received by more people, workplace pension payments accounted for more total income. In other words, workplace pension payments represent a very large income flow for people across Canada.

However, as private sector employers have increasingly abandoned pension commitments, retirement security has become highly uneven. Workers in the public sector are now far more likely to be covered by a pension plan than those in the private sector. Moreover, almost all workers in the public sector with a pension have a defined-benefit plan that guarantees retirement income.

As Macdonald notes, defined-benefit plans “should be the standard for all workers,” but unfortunately they are not. Far from it in recent years.

According to the report, in the 1970s, 90 per cent of private sector workers with a pension had a defined-benefit plan. Today, the share of private sector workers with a defined-benefit plan has plummeted to 40 per cent. To varying degrees, defined-benefit plans place the onus on employers to provide a guaranteed income in retirement. Should the plan’s investments underperform, the employer is on the hook to make up the shortfall. Among those with pension coverage in the private sector now, however, defined-contribution plans are much more common. Such pension schemes require employers to make contributions but remove any obligation for the employer to secure or maintain benefits in retirement. Instead, plan performance determines payments, shifting the risk to workers.

Governments have long recognized that falling pension coverage and retirement insecurity are issues. Recently, public plans like the Canada/Quebec Pension Plan were enhanced to make up some of the shortfall. Yet, when these public programs were introduced in the 1960s, they were deliberately kept small on the assumption that workplace plans would provide the vast majority of retirement income. Consequently, public plans would need to be expanded significantly to cover the gap that falling workplace pension coverage is opening.

The positive impacts of pensions on workers’ well-being are well established. Perhaps less well known are the various economic benefits that pensions contribute to society more broadly. The Power of Pensions notes a host of examples, from higher tax revenue to savings on senior supports and government transfers.

For starters, pensions are pooled investments and thus a stable and long-term source of capital, for all the class contradictions this introduces for workers. In fact, worker and employer contributions made up only 18 and 14 per cent of pension revenues in 2023-24, respectively. The remainder of pension revenues came in the form of investment income. Thus, while employers and governments often complain about the cost of pension contributions, in fact, the vast majority of retirement payments are made from investment returns, not contributions.

Macdonald also shows how workplace pensions impact government revenues. Because pensions are taxable and retirees spend their pension incomes on goods and services, governments see pension payments in part returned through income and sales taxes. In addition, workplace pensions render workers less dependent on government supports in retirement.

At the federal level, the report finds that government coffers will be $24.5 billion better-off because of workplace pension incomes that support retired workers. Additional income and commodity tax revenue account for $16.9 billion and $2.3 billion, respectively. Workplace pension incomes further offset costs from the public pension system, particularly programs that support low-income seniors. For example, pension plan income will save $1.2 billion in Old Age Security (OAS) and $3.2 billion in Guaranteed Income Support (GIS) payments. At the provincial level too, governments will see $16.8 billion in savings attributable to pension income. Ontario and Quebec alone account for roughly $6 billion each of these savings.

All told, Macdonald finds that a $1 increase in pension income results in 41 cents in tax revenue and savings on seniors’ supports across all levels of government.

Moreover, pensions pack a direct economic punch for governments contributing to their own workers’ retirement plans. As Macdonald writes, “In 2023–24, every dollar that governments contributed to their own workers’ pension plans returned $2.38 in higher tax revenue and saved seniors’ supports from retired public sector workers.” Recall that pension payments are mostly investment income. Governments therefore wind up receiving more in tax revenue paid on workers’ pension income than they paid as pension contributions. This is a hugely important finding and exposes the irrationality of right-wing calls to attack unions, particularly those of public sector workers. As Macdonald concludes, “Pension income is a boon for both federal and provincial governments.”

The report also provides strong evidence demonstrating the local economic impacts of pension incomes. Particularly in cities and regions where money from employment represents a smaller share of total income, pensions provide vital economic stimulus.

Additionally, workplace pension coverage is, as Macdonald argues, “a great equalizer.” Among groups historically disadvantaged in the labour market, workplace pensions, particularly in the public sector, improve economic security and reduce inequality. For example, roughly 90 per cent of women in the public sector have a pension plan, while just 44 per cent in the private sector do. For Indigenous workers, 86 per cent have a retirement plan in the public sector, but only 46 per cent do in the private sector, where it’s unlikely to be a full pension. Seventy-nine per cent of “new Canadians” have a retirement plan in the public sector, compared to only 45 per cent of those in the private sector. In other words, broad pension coverage tends to equalize economic benefits and security across all workers and thus benefit historically disadvantaged groups.

Although pensions generated economic benefits well beyond those directly receiving benefits, the fact remains that far too few workers enjoy pension coverage. Particularly in the private sector, employers have been slowly bailing on pension plans, especially defined-benefit plans — the ‘gold standard’ of retirement security.

As the report concludes, “Better retirement security through pensions is good for workers, but those workers also play an outsized role in the Canadian economy, in government finances, in ensuring equity for historically disadvantaged groups and in supporting local communities.”

Findings from this report make clear that broad pension coverage is a net good for workers and the economy overall. But that doesn’t mean everyone is on board. Pensions cost employers, and thus there’s no sugarcoating the fact that winning retirement security for all requires class struggle with the bosses. The Power of Pensions at least provides intellectual ammunition.

Share on Twitter

Share on Bluesky