Economic Retirement

ECONOMIC RETIREMENT 13

Comparison of the structure of pension provisions in Canada andAustralia

Pensions are in every country across the world and they followcertain particular structures depending on the country. A pension canbe defined as a form of continuous payment, which an employee pays toa fund through his or her employer. The amount paid is a lateravailed to the employee during his or her retirement years. Pensionswere formed as a way of ensuring that retired employees are leading acomfortable life after their retirement. It is evident that anemployee must retire at a certain age and will definitely need moneyfor maintenance. There are two major categories of pension schemesnamely the defined benefit plan and the defined contribution plan. Inthe defined benefit plan, the employer or the sponsor enters into anagreement with the employee where the employee will be entitled tocertain amounts of benefits every month. It is essential to note thatthe formula arrived at determining the benefits depends on the amountof salary, age of the employee and the time the employee worked forthe company. On the other hand, the defined contribution planinvolves a fixed monthly contribution by an employee to a fund thatis invested. The amount that the employee contributes is availed tohim at the time of retirement (O. E. C. D, 2011). However, it iscritical to note that there is no defined formula or fixed amountthat the retired employee will be receiving on a monthly basis.Different countries will have varying pension structures. This termpaper seeks to compare the structure of pension in Canada and the onein Australia.

Structure of Pension provision in Canada

The pension plan in Canada is designed in such a way that everyemployee is required by law to pay monthly contributions to the fund.Unlike in some countries such as Britain where employees have achoice of either or not contributing to the plan, Canada requiresevery employee, whether in the public or the private sector to paymonthly contributions to the plan. The plan, which is known as theCanada pension plan (CPP), is a universal plan and it has certain keyelements which are vital to note (Tang, 2015). The CPP isadministered by the government of Canada and every eligible Canadianis supposed to contribute to the plan. It is, however, critical tonote that the people residing in Quebec are not supposed or requiredby law to contribute to the CPP but rather contribute to the Quebecpension plan.

Another critical aspect that is notable with the Canada pension planis the fact that it is based on contributions made by employees andtheir employers. The CPP does not receive any other form of fundingfrom the government or otherwise. The employee pays a certain amountto the plan while the employer pays another amount on behalf of theemployee. In the case of a self-employed Canadian, the amount paid tothe pension will include that of the employee and that of theemployer (Tang, 2015). Although the CPP does not receive any formextra funding, it is essential to note that the amount contributed bythe employees is normally invested. This may lead to an increment inthe amount as a result of the accrued profits. The Canadian pensionplan is normally tied to ones employment and it is clear that onemust participate in the workforce in order to be eligible for thepension.

The government of Canada has selected the age of 65 years as theretirement age and as the age at which an employee will startreceiving the pension. However, the structure of the Canadian pensionplan has some other provisions. For instance, the pension providesfor any employee to apply for the pension from the 60thyear. However, the monthly payout for the pension is reduced if theemployee requests for the pension at this age (Tang, 2015).Additionally, the pension provides that the employee may choose notto retire at the age of 65 years and continue working till the age of70. In such a scenario, the employee will be contributing to thepension plan while still receiving his monthly benefits. It is worthnoting that the pension benefits will be higher while the employee isworking past the age of 65 years till 70 years. The contributionsmade after the age of 65 years goes to the post-retirement benefitswhich increases the retirement benefit.

Another feature of the structure of the Canadian pension plan is theprovision of benefits and pension to the contributor in the case ofdeath or disability. In instances where a contributor becomes disableto the extent that he or she cannot ably work to generate income, theCPP will offer monthly benefits to the contributor and his children(Tang, 2015). When a contributor dies, the benefits from the pensionmay be paid to the estate, the children or the spouse. This is afeature that ensures that the dependants to the contributor do notsuffer as a result of the death of the bread winner.

One major aspect that he Canadian pension plan has is the way thatthe amount which contributors receive as benefits is calculated (O.E. C. D, 2011). The amount is calculated on the basis of thecontributions made and the period which the contributor has beenpaying towards the fund. When calculating the amount to be receivedmonthly, the months when a contributor earned lowest income may beexcluded hence increasing the benefits. This exclusion is under thegeneral drop out provision (Tang, 2015). The child rearing provisionin the plan is another provision which a contributor can use toincrease the benefits. This is because the contributor can argue thathe or she contributed earned little or had zero earning since he orshe was the primary caregiver for the children.

It is evident that people are living in such times when the economyis very fragile and the cost of living is hardly constant. The costof living may go up any time and gladly the Canadian pension planauthorities have this catered in their distribution of the benefits.The government relies on the consumer price index to determine thecost of living and adjusts the pension benefits accordingly (Tang,2015). This adjustment is done every January or every year. This is aprovision that ensures that the beneficiaries are not hard hit by thefluctuating prices of house hold commodities.

Another important feature of the Canadian pension plan that needs tobe looked at is the rates. Employees are obliged by the law tocontribute 4.95% of their pensionable earnings per month. Theemployer is also required to contribute 4.95% of the employee’spensionable income to the CPP. For the case of the self-employedpeople in Canada, they are supposed to contribute for both theemployee and the employer hence they contribute 9.9% of their netpensionable income (Tang, 2015). It is worth noting that the postretirement benefit contributions are calculated using the same rates.

Besides the CPP, there are other mechanisms that Canadians cansecure a retirement income. There are some government subsidies thatare given to the seniors in a bid to ensure that they lead a minimumstandard life after retirement. The subsidies come in form of old agesecurity (OAS) and the guaranteed income supplement (GIS) (Tang,2015). It is worth noting that these programs do not require theemployee or the employer to contribute anything, but are paid throughwelfare programs and government revenue. Another plan is the privatedefined benefit pension that guarantees the employee benefits fromthe employer after retirement. This is a plan that provided by theemployer (Tang, 2015). Institutions such as large companies,municipal, federal and provincial services all offer the plan benefitto their workers. Lastly, employees can contribute independently tosome plans such as the Registered Retirement Saving Plan through theprivate contribution-based savings plans.

Structure of Pension provision in Australia

The structure of the pension provision in Australia is designed insuch a way that there is a pension paid to the elderly above the ageof 65 years and there is a mandatory contributions by employees of 9%of their salaries into a Superannuation Guaranteed Scheme. The superaccounts are meant to ensure that the employees do not rely solely onthe government after their retirement (Anderson, 2015). The pensionpaid to the elderly, known as the Age Pension has been in existencein Australia since 1909. One critical feature about the Age pensionis that the employees are not meant and do not contribute towards thefund. The elderly are paid the pension from government collectedtaxes (O. E. C. D, 2011).

There are strategies which are employed in determining who will getthe Age pension in Australia. A means-testing is carried out on theelderly to determine their wealth and decide the people who willreceive the pension benefits. The elderly people who are found to bewealthy or have alternative sources of income may have their pensionsreduced or cut off totally. The Age pension payouts in Australiaconstitute at least 2% of the GDP of the country (Anderson, 2015).This is an issue that has raise political and economic questions withregard to the sustainability of the scheme. This percentage of theGDP is expected to rise over the years as more people are getting oldand retiring.

The contributions that employers make to the super account on behalfof the employees are exempted from tax. The percentage has beenrising from the original 3% to the current 9%. The employees can haveaccess to the total amount after retiring and can spend it inwhichever way they feel like. The amount is not taxed and thereforethe retired employee will receive the entire amount (O. E. C. D,2011). The Australian government came up with this mandatorycontribution to ensure that there are few people who are dependent onthe Age pensions. However, considering that that the governmentcarries out means-testing before giving out Age pensions, many peopledecide to spend the saved amount in various low interest products andservices such as tours and jewelry (Anderson, 2015). Retirees makesure that the amount does not count in the means-testing by thegovernment. Every retiree in Australia targets the Age pension.Research has also indicated that people are opting to use the savedamounts in the super accounts before they retire.

Another aspect of the Australian Age pension is that the elderlyreceive a flat rate of benefits. Considering that the pension doesnot rely on the contributions, every beneficiary is eligible for asimilar amount. It is not all the elderly retired people who relysolely on the pension (Anderson, 2015). The Australian bureau ofstatistics has indicated that it is only 46% of the elderly who relysolely on the benefits. The rest of the people use the pension assupplementary income to their other sources of income such asdividends and interests. The superannuation has also come in handy inhelping more than 17% of the retirees to stop relying solely on theAge pension as the only source of income for them (Anderson, 2015).

Similarities in the pension provisions in Canada and Australia

There are a number of striking similarities between the structure ofpension provisions in Canada and those in Australia. To start with,the information above has clearly indicated that both schemes targetelderly people past the age of 65 years. This is because such peopleare retirees and most of them do not have any other source of income.Although the age of women was different prior to 2014 in Australia,it is worth noting that the ages for both genders are now 65 years.Another similarity is that both pension provisions aim at ensuringthat the beneficiaries lead a comfortable life and do not suffer as aresult of their retirement.

The superannuation in Australia which was introduced 20 years agohas the same plan as the Canadian pension plan (CPP). This is becausethe employers are supposed to contribute 9% of an employee’s salaryto a savings account. The saved amount is availed to the employeeafter retiring. Although the superannuation may have slightdifferences from the CPP, it is clear that the concept is the same.It is actually worth noting that the percentage deducted is almostequal. Additionally, payments in both countries are mandatory forevery employee whether in the public sector or in the private sector.

In both plans, employees may choose to continue working and earnmore pension as they work. This is an aspect that ensures that theemployees are receiving pension while still working. Whereasemployees in Canada earn post retirement benefits while the employeesin Australia earn bonuses. Another similarity that is noted betweenthe two schemes is that they are several ways of contributing towardsan income in old age. Canada has over four schemes which werementioned above through which employees can contribute towards aretirement benefit plan. There is also the superannuation inAustralia besides the Age pension (Leow et al., 2010).

Lastly, there is a similarity in that the pensions payable to thebeneficiaries are subjected to indexing in both countries. There isconsidering of cost of life and the pensions are adjusted annually.This is aimed at ensuring that the beneficiaries are in a position tokeep up with the consumer prices and even wages.

Differences between the structure of pension provision in Canadaand Australia

There are numerous differences between the two pension provisions inthe two countries. Numerous researchers have looked into theAustralian system and have argued that other countries such asCanada, USA and UK should emulate and copy the system. The pensionsystem in Australia has been there for over a 100 years since 1909and it remains to be one of the most successful plans across theworld. The pension plan does not compare with any other across theworld including that of Canada. To start with, the most strikingdifference is that the Age pension in Australia does not requireemployees to pay contributions every month. The government ofAustralia pays the pension benefits to retirees who are past the ageof 65 years from government revenue (Leow et al., 2010). This isunlike in Canada where the employees contribute a percentage of theirpensionable salary to the fund ad they receive it after retirement.The benefits in Canada are paid monthly and the government decidesthe amount it will be paying per month.

Another difference is that the amount paid as pension benefits inCanada depends on how much one saved, the amount of salary and theperiod an employee worked. Therefore, employees who used to earn alittle might end up receiving extremely little benefits. This iscontrary to the system in Australia where there is a flat rate(Anderson, 2015). Every eligible elderly receives the same amount.This is because the government does not need to calculate how muchsomeone contributed and for how long one worked. On the side of thesuperannuation, the amount contributed by the employer will beavailed to the employee immediately after retirement. This amount isnon-taxed and is given in total.

In Australia, there is a process called the means-testing before thepension benefits are given to the beneficiaries (Anderson, 2015).This is different in Canada where a beneficiary’s income and wealthstatus does not matter in the payment of the pension. This is becausethe pension in Canada is indeed payment of a section of a salary thatwas not paid. In Australia, the government carries out themeans-testing to establish the wealth of the beneficiary (Leow etal., 2010). This helps the government to determine the people who arein real need of the money. Houses are, however, not considered aspart of the wealth when carrying out the means-testing. This hasindeed encouraged numerous people to invest in building homes.

The superannuation in Australia, which is similar to the pensioncontributions in Canada, has the aim of reducing the number of peopledepending on the Age pension. This is contrary to the aim of thepension contributions in Canada which are aimed at ensuring that thecontributors lead a comfortable life after they retire. Employees inCanada are allowed to request their pension from the age of 60 years.This is not the case in Australia where the employees must attain theage of 65 years, qualify for the Age pension and then receive thebenefits (Leow et al., 2010).

Although the Canadian government pays some seniors some benefits, itis clear that this is extremely little in comparison to the amountpaid by the Australian government. The pension in Australia is fullyfunded by the government and now the superannuation. In Canada, thegovernment does not contribute towards the pension. However, it isworth noting that the government invests the money contributed by theemployees. This may increase the benefits that the retired employeeswill receive.

The payment of Age pension and the contributions through thesuperannuation in Australia is governed by one Australian government.In Canada, the pension payment is divided into two regions thepeople residing in the various places in Canada and those residing inQuebec (Shecter, 2015). However, employees working in Quebec canstill pay the CPP and demand for pension at their retirement.

Lastly, in Australia, the pension is mainly availed to all peoplepast the age of 65 years regardless of whether they were working ornot. In other words, the critical requirement is age. Residentialrequirements are also essential in determining whether one willreceive pension benefits or not. However, in Canada, the pensionbenefits are only entitled to former employees who have retired.Additionally, residential requirements are checked and also the age.Employees who contributed a section of their income receive back themoney they contributed (Shecter, 2015). It is evident from thedifferences and the few similarities above that there are indeedenormous differences between the two structures. Every country acrossthe world seems to have varying ways and systems of availing benefitsto the elderly. Australia seems to have a formula that worksperfectly and which other countries admire.

Conclusion

This term paper has clearly demonstrated what a pension is and hasgiven a deep analysis of the structure of the pension both in Canadaand also in Australia. There are similarities and differences betweenthe pensions in both countries which have been clearly brought out.It is the duty of every citizen of any country to plan for the oldage. This can only be done through saving at a young age when one isstill energetic and working. This is idea behind pension plans.Pension plans are aimed at ensuring that the retired employees lead acomfortable life. Research will indicate that the government in manycountries might find it hard to cater for all the retirees and theelderly. This could be even more difficult for the developingcountries. Employees must therefore pay a section of their salarywhich will be availed to them after they retire. Retirees may ask forthe entire amount at once, or they may receive the benefits onmonthly basis.

Australia seems to have an extremely well organized and workingstructure where employees were previously not required to payanything towards a pension plan. However, with an increasing agingpopulation, the employees are not required to pay 9% of theirsalaries into a personal savings account (Leow et al., 2010). Thisaspect which is called superannuation is aimed at helping theemployees to be independent and stop relying on the government forAge pension. It is extremely exceptional for Australia to have thegovernment paying pension benefits while it does not collect anycontributions. In Canada though, it is mandatory to contributetowards the CPP in order to be guaranteed a payout after retirement(Shecter, 2015). Both countries have presented a structure of pensionprovision that targets people at old age and that seeks to ensurethat such people lead comfortable lives. Although there are hugestructural differences between the two pension provisions in the twocountries, the bottom line is that they seek to assist the elderlyretirees.

References

Anderson, S. (2015). Interactive: How Australia`s pension systemworks. Retrieved on 19th from: http://www.sbs.com.au/news/article/2014/06/13/interactive-how-australias-pension- system-works

Leow, J., Murphy, S., Hooper, G., &amp CCH Australia Limited.(2010).&nbspAustralian master superannuation guide2010/11. North Ryde, N.S.W: CCH Australia.

O. E. C. D. (2011).&nbspPensions at a Glance 2011:Retirement-income Systems in OECD and G20 Countries.Paris: Organization for Economic Co-operation and Development.

Shecter, B. (2013). Canada should consider Australian pension modelas alternative to CPP expansion: report. Financial Post.Retrieved on 19th from: http://business.financialpost.com/news/fp-street/canada-should-consider-australian- pension-model-as-alternative-to-cpp-expansion-report

Tang, L. (2015).&nbspCanada`s public pension system made simple:The secrets to maximizing your retirement income fromgovernment pensions.