Understanding the retirement income system

Evidence shows that many Ontarians are not saving enough to maintain their standard of living in retirement. Beyond the statistics, many feel insecure and uncertain about their financial future.

It’s important to learn how the retirement income system works, so that you and your family can have the retirement security you deserve.

Retirement income

The Canadian retirement income system is typically described as having three parts:

  1. Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). OAS provides a monthly benefit to almost all Canadians when they reach age 65. GIS provides supplemental income to Canadians who have low retirement incomes.

  2. Canada Pension Plan (CPP) provides a monthly benefit to people who have contributed to this publicly-administered plan over the course of their working lives.

  3. Personal Savings and Workplace Pension Plans. Workplace pension plans are privately administered by employers who choose to offer them. Personal savings can include Registered Retirement Savings Plans (RRSPs), savings accounts, investments and home equity.

These combine to fund your retirement, but the importance of each one may differ depending on your personal circumstances.

How much you should save

Retirement experts suggest that households should aim to have 50-70% of their pre-retirement income for living expenses in retirement.

For example, assuming you want to replace 70% of your pre-retirement income:

  • If your annual pre-retirement income is $20,000 per year:  your standard of living in retirement will likely be maintained by OAS and CPP income, even without additional income from savings.

  • If your annual pre-retirement income is $40,000 per year: in addition to OAS and CPP income, you would need an additional $11,795 per year, which must come from your personal savings and/or workplace pension plans to maintain your standard of living in retirement.

  • If your annual pre-retirement income is $75,000 per year: in addition to OAS and CPP income, you would need an additional $33,329 per year, which must come from your personal savings and/or workplace pension plans to maintain your standard of living in retirement.

Challenges for the future

Fewer pensions, lower savings

The number of workers enrolled in a workplace pension plan is steadily declining, and personal savings by Ontarians have decreased over the past 30 years.

Graph: Percentage of paid employees in employment pensions plans by sector, 1977-07

This graph compares the percentage of private sector and public sector employees enrolled in Employment Pension Plans (EPPs) from 1977 through 2008. Public sector employees are represented by a red line in the top third of the graph and private sector employees are represented by a teal-coloured line near the bottom third of the graph. The graph illustrates that the percentage of paid employees enrolled in Employment Pension Plans in the private sector went from roughly 35 per cent in 1977 to 25 per cent in 2008. In contrast, the graph shows that the percentage of paid employees enrolled in Employment Pension Plans in the public sector went from roughly 75 per cent in 1977 to roughly 83 per cent in 2008. Source: Research Study on the Canadian Retirement Income System, Ministry of Finance, Baldwin report, figure 10, section 6.2

Consequences

For households not contributing enough to their personal savings (see Table 1 below), this means:

  • The income provided through the CPP and OAS may not be enough to maintain their standard of living in retirement. As a result, a drop in the household’s standard of living may occur.

Other challenges

Other pension challenges we will face in the future include:

  • Increasing life expectancy: the number of years that a person will live after age 65 has increased significantly. This has put pressure on pension plans and personal savings to provide retirees with enough income to maintain their standard of living.

Graph: Canadian household savings rate, 1981-2013

This graph illustrates the decline in the Canadian household savings rate from 1981 to 2013.The graph compares what percentage of disposable (after tax) income Canadians saved every year from 1981 to 2013. The graph highlights three major points in the Household Saving Rate since 1981. The first point is in 1982, when the household savings rate was at a historical high of 18.8 per cent. The second point is the historical low of 1.5 per cent in 2006. The third point is the most recent release of the household savings rate in 2013, at 5.2 per cent. Although the household savings rate has increased slightly over the past decade, this graph shows that Canadian household savings have been declining over the past 30 years. Source: Statistics Canada Table 380-0072
  • Pressure on younger workers: if many future retirees do not have adequate incomes, younger workers will bear the cost burden, either through higher taxes to support programs for seniors or through direct financial support of older family members.

  • Government spending: inadequate retirement savings will put pressures on federal and provincial resources funded by taxpayers.

Updated: November 10, 2021
Published: April 14, 2014