Retirement Incentives and Decisions across the Income Distribution: Evidence in Canada

We evaluate the retirement incentives embedded in Canada’s retirement income system with attention to where individuals are located in the income distribution. We find that larger social security benefits are available to individuals with lower earnings in their work history because of the benefit income tests, but those from the top of the income distribution tend to enjoy longer lives over which they may receive benefits. Overall, we see greater Social Security Wealth among individuals from lower deciles. The implicit tax rates on continued work tend to be higher for workers from lower-earning deciles. Considering changes to actuarial adjustments associated with early pension take up, these implicit tax rates on work at older ages fell substantially after 2011. Our regression estimates confirm the importance of incentives on retirement behavior, with substantially larger effects for individuals in lower deciles. These effects are greater for women than men. In simulations, we show that changes to the actuarial adjustment had some impact on retirement rates by lowering the implicit tax on work. The overall redistributive effect of these induced retirement changes was fairly small, however, as the actuarial adjustments brought the system closer to actuarial fairness.