Income Protection for Retirees Canada

Canadians are encouraged to save for retirement through registered pension plans (RPPs) and registered retirement savings plans (RRSPs). Registered pension plans, which may be referred to as private or occupational pensions, are of two basic types: (1) a defined benefit plan and (2) a money purchase, or defined contribution plan. Most RPPs require employee contributions. Like their counterparts in the United States, defined benefit plans in Canada promise a specific benefit based on earnings and years of covered service; employers are required to fully fund these plans. A defined contribution plan merely defines the contribution level; payment at retirement depends on accumulated contributions and the return on the investment of those contributions.

While the CPP and QPP cover virtually all workers in the paid labor force, registered pension plans covered only about 40 percent of paid workers in 1997. Private pension plans in the United States cover approximately half of the workers in the paid labor force. In both countries, coverage is greater among employees in larger establishments than in small ones. Men and higher-wage workers are more likely to be covered than women and low-wage workers. In neither country are cost-of-living adjustments required.

A registered retirement savings plan is a tax-deductible savings plan that, up to certain limits, allows individuals to claim tax deductions for retirement contributions. Contributions accumulate tax free, as do individual retirement account (IRA) contributions in the United States. Funds are subject to taxation when they are received, unless used to purchase a retirement annuity or registered retirement income fund, in which case tax deferment continues until the funds are received as retirement income. As of 1999, Canadian tax filers who claimed retirement savings set aside over 11 percent of their income for retirement; 55 percent of that was in RRSPs, and 45 percent in RPPs.