Replacement Rates of Public Pensions in Canada: Heterogeneity across Socio-Economic Status

Abstract

Several income sources can help retirees maintain their welfare and consumption levels once they leave the workforce. One source is public pensions. Their importance as an income source varies greatly according to socio-economic status (SES). In this article, we analyze how replacement rates (RRs) of public pensions (Old Age Security and Guaranteed Income Supplement) and mandatory public pension benefits (Canada/Quebec Pension Plan [C/QPP]) vary across SES by using the Longitudinal and International Study of Adults dataset. Taking advantage of the longitudinal nature of this survey, we compute and compare average RRs by SES. We specifically consider the role of education and health to understand variations in RRs. Our results show that the average RR of public pensions for individuals in bad health is 32 percent, whereas for those who report being in good health, it is 21 percent. When public pensions and C/QPP benefits are included, these percentages become 54 percent for those in bad health and 41 percent for those in good health. When estimating a multivariate regression model and controlling for past income, we look at couples and find that past income does not eliminate differences in RR by education level and health status. Our results suggest that assortative matching could play a role in explaining the variation in RRs across individuals’ education.