Pensions and Retirement: International Evidence in the Canadian Context"
with Kevin Milligan. HRSDC-IC-SSHRC Skills Research Initiative Working
Paper Series 2006-A-13, June 2005.
This paper examines evidence on the impact of Canada's public pensions on
the retirement decisions of the elderly. Public pensions may affect a
person's labour market decisions in one of two ways. First, a wealth effect
exists when public pensions increase a person's total lifetime income,
inducing the person to spend fewer years in the labour market and retire at
an earlier age. Second, an accrual effect may exist if the discounted
present value of future pension flows depends on the date of retirement. If
so, then the rate of accrual of rights to future pension income may affect
the timing of retirement. Through descriptions and simulations, we document
the components of Canada's income security system and show how they act
independently and in concert to change the incentives to retire.
The major contributing factors are:
- The actuarial adjustment of the Canada/Quebec Pension Plan does not
sufficiently compensate for the foregone year of pension receipt.
- The Guaranteed Income Supplement exacerbates the insufficiency of the
- For workers 65 and over, the Guaranteed Income Supplement decreases
the return to work significantly.
- Married couples have different incentives because changes in pension
entitlements are echoed in survivor benefits.
- Women have different incentives because they have a different
mortality curve and because they are less likely to predecease a spouse.
To best place the importance of labour market disincentives on actual
retirement behaviour in context, the paper provides a thorough survey and
critical review of the international evidence on public pensions and
retirement. Through nearly thirty years of research across many countries
and dozens of studies, the broad weight of the evidence suggests that the
structure of public pensions contributes to the decision to retire. These
findings are corroborated in studies of the retirement behaviour of
The paper concludes with three major findings:
- The Canadian retirement income security system generates work
disincentives, although they are small relative to many European
- International evidence suggests that work disincentives influence the
decision to retire.
- The disincentives and the reaction to them are strongest among
low-income Canadian seniors.
HRSDC-IC-SSHRC Working Paper 2006-A-13