How Do Public Pensions Affect Retirement Incomes and Expenditures? Evidence over Five Decades from Canada

Kevin Milligan, David A. Wise

NBER Retirement Research Center Paper No. NB 13-Q1
Issued in December 2013

In this paper, we study the impact of Canada's public pension system on the income and expenditures of the elderly from 1960 to 2010. Our analysis reveals three important findings. First, we document that the expansion of Canada's public pension system over the last 50 years has coincided with a large improvement in elderly living standards, measured by income or consumption. Second, we causally relate these changes using an instrumental variables strategy exploiting variation across ages and years in the Canadian system. We find strong evidence that public pensions have lifted income. For expenditures, the evidence is more mixed but there is strong evidence of improvements in reducing expenditure poverty. Third, taking our estimates on the effect of income poverty we perform counterfactual simulations by applying the public pension system of different decades to the data from the 2000s. We find that the 2010 system reduces relative income poverty by 88 percent relative to the system in 1960, for those aged 70 to 79. For relative expenditure poverty, the corresponding reduction is 56 percent.

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