A Crisis in the Making?

On Monday, the Montreal Gazette published its first of three editorials, Pension anxiety: a crisis in the making:

Christmas is over, and Boxing Day, too, and grim reality will return with the mail: credit-card bills and other evidence of our recent financial folly. New Year's Day will open RRSP season, when we're urged to invest for retirement.

There's a new anxiety about retirement in many Canadian households. After the investment tumult of the last couple years, Canada's greying population is coming to realize that "the golden years" may be turning to dross.

Today, we begin a three-day series of editorials on Canadians' pensions. Below, we outline the problem. Tomorrow, we'll look at some proposed remedies. And Wednesday we'll suggest where the national debate should go from here.

Typically, Canadians have three sources of money for retirement: government pension, workplace pension and private savings. But government pensions are not generous, workplace pensions cover too few of us, and private saving just isn't happening:

Government: For 2010, maximum payments under the Canada or Quebec Pension Plan plus federal Old Age Security will be under $1,500 a month.

Workplace: 11 million Canadians in the private sector do not have company pension plans. Among those who do, "defined benefit" plans, which put investment risk mainly on the employer, are dwindling away. One recent survey said 59 per cent of employers plan to reassess pension costs, and 43 per cent hope to reduce costs for retiree health benefits.

Private: Canadians use less than 10 per cent of the total "room" we have to invest in Registered Retirement Savings Plans, although RRSPs allow us to save on income taxes while saving for retirement.

Canadians are outliving our pensions. Life expectancy at birth, 77.8 years in 1991, is now 81.9 for men and 85.1 for women. Each year now, a lower proportion of Canadians will be working and paying into the Canada and Quebec Pension Plans, and a higher proportion will be retired and drawing money. By 2030, one-quarter of Canadians will be 65 or older. Something will have to give.

Fortunately, those who monitor these things - actuaries, union officials, professors, some politicians - are coming up with various ideas about how to deal with all this.

But our political leaders are less than eager to wade into this swamp. Meeting in Whitehorse this month, Canada's finance ministers accepted a report from prominent economist Jack Mintz, who said Canada's pension system is working fine. It's a view only an actuary could love: Mintz conceded that over half of private-sector workers lack employer-backed pension plans. The finance ministers just shrugged. "It's certainly not a system in crisis," said Ontario's Dwight Duncan.

They gave less credence to another report, commissioned by Duncan, which warned again about private-sector workers without company pensions, and said a "significant minority" of middle- and even upper-class workers will find themselves much poorer in retirement.

No crisis? If it's not a crisis, it's at least a problem growing toward crisis status. Tomorrow, we'll look at some of the proposed solutions.

On Tuesday, the Gazette published the second editorial, No shortage of ideas on how to fix pensions:

Yesterday we outlined the dark clouds gathering around the pension prospects of Canada's aging workforce. Today we'll survey some of the numerous proposals coming from all sides.

In a field with little consensus, one point goes unchallenged: Governments don't have money to sweeten the pot. With tax revenues down and deficits up, governments may change the rules on pensions, but funding will have to come from employers and employees, not taxpayers.

This being Canada, the provinces and Ottawa will have to co-operate on nationwide reform. As it happens, the governments of British Columbia and Alberta have been leading the charge for a new layer of pension plan. They, and to a degree Saskatchewan, are in loose agreement on finding a way to top up Canada Pension Plan payouts for those who choose - this would be voluntary - to pay more during their working years.

In Ottawa, Liberal chief Michael Ignatieff, often criticized for policy vagueness, has issued clear proposals for something similar, a "Supplementary Canada Pension Plan" through which people could "voluntarily invest extra funds in our trusted national pension."

Ignatieff adds two other proposals: that workers whose pension money is "stranded" by a corporate bankruptcy could have that money managed through the CPP; and that those on corporate long-term-disability pensions should be given preferred status as creditors in any bankruptcy.

Union leaders are calling for even stronger protection for private-sector workers' pensions imperilled in a bankruptcy. It's a hot issue: Many former Nortel employees, for example, are awaiting a sharp cut in pension payments; a nasty shock when you're, say, 75.

Finance Minister Jim Flaherty recently proposed some such improvements, but they would cover only federally-regulated industries, roughly seven per cent of all private-sector workers. Ontario has taken some steps in this direction, too.

Some union leaders want the government to just increase existing pensions. Paul Moist of the Canadian Union of Public Employees, for example, wants C/QPP benefits - and the payroll deductions and employer contributions that pay for them - to be doubled, over a multi-year phase-in period. This is the New Democrats' position, too. Since 93 per cent of employed Canadians pay into the plans, this would be an efficient way to offer better benefits to almost everyone, he says. And the CPP has the advantage of being actuarily stable at least into the 2080s.

The financial-services industry - the companies vying for your RRSP money and the ones which run pension plans for companies - have reacted as you might expect to the idea of a bigger government role. The Investment Funds Institute of Canada, for example, want changes in employer-sponsored pension plans and RRSPs to make these private vehicles more attractive to individuals and companies.

In other words, they want to hold onto their share of the pie. The Canadian Bankers Association says "the savings system in Canada is not broken and there is not a pressing need for a new one-size-fits-all retirement savings program." Sun Life Canada president Dean Connor proposes that unrelated employers be allowed to band together in big new private pension programs with group RRSPs and automatic enrolment, with an opt-out clause. While the CBA is resisting a "one size fits all" federal initiative, Connor warns against the provincial plans B.C. and Alberta are considering, calling them "a patchwork quilt."

Meanwhile the Financial Advisors Association of Canada says an improved CPP/QPP and private-side improvements may both be needed. Other people propose tax changes - more generous RRSP rules, say - to encourage people to save individually for retirement.

There is, then, no shortage of ideas on what to do about pensions. Tomorrow we'll offer our own thoughts.

On that famous Jack Mintz report, please read Jim Murta's actuarial blog where he recently went over the report in great detail. Jim concludes:

So, the conclusion is that “overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.” This is only true if the value of the owner-occupied home is included as an asset. This explains most of the gap in understanding between Dr. Mintz’s report and the views of Canadians. As a policy paper, this one is not of much help. There are too many guesses and assumptions. What is needed is a comprehensive longitudinal study, one that traces what actually happens to retirees’ incomes.

Another expert, Bernard Dussault, Senior Research and Communications Officer at the National Association of Federal Retirees, and the former Chief Actuary of Canada, shared these thoughts with me following the Whitehorse meeting:

Two years ago, four provinces were most concerned with serious pension issues and launched 3 provincial commissions.

Last year, the federal government was much concerned with similar pension issues and launched two series of consultations.

Through the Jack Mintz's and the Bob Baldwin's reports, these 5 governments are now being told that the status quo is an option. I look forward to see how these governments' reaction. Here is mine.

Both reports refer to Statistics Canada's figure to the effect that the rate of poverty among Canadian is only 4%. But neither report refers to the GIS take-up rate of 35%. Yes, 35% of Canadians over age 65 receive a GIS benefit.

A perhaps surprising extreme example of such recipient is a person receiving the maximum CPP retirement pension (about $11,000) and the OAS benefit (about $6,200) but no other income. That person is entitled to a GIS benefit of about $1,500 (i.e. 50% of the difference between about $14,000 and $11,000). Disregarding any provincial GIS supplement, as the case may be, e.g. Ontario's GAIN program, this person's total retirement income therefore amounts to about $18,700. As this is about the threshold of poverty for someone living in a large municipal area, this extreme case is at the verge of falling (if not already already) in the category of poor persons. As most cases are not extreme cases, the poverty rate is in all likelihood much closer to 35% than 4%.

Obviously, the status quo is always an option, but the recognition of the reality of poverty is not.

I went over some of my thoughts on the Canadian pension debate roughly two weeks ago. With all due respect to Jack Mintz, I'll take the expert opinions of Jim Murta and Bernard Dussault over his on the pension crisis. If politicians prefer to avoid discussing this issue, they're only delaying the inevitable and mark my words, this issue will come back to haunt them.

***UPDATE***

On Wednesday, the Gazette published its third editorial, Pension woes won't be easy to fix, stating that the problem isn't in public pensions but private pensions. I beg to differ. The pension crisis may touch the private sector first, but it's only a matter of time before it reaches the public sector. Importantly, if we don't fix the major governance gaps at the large public pension plans, another disaster similar or even worse than 2008 will occur. When it comes to fixing pension woes, tough political decisions will need to be taken and stakeholders need to significantly improve the governance at major public plans.

Also on Wednesday, Daniel Leblanc and Bill Curry of the Globe and Mail report that Ottawa targets public service pension plan for cutbacks. A proposal is circulating to put an end to early-retirement provisions for new hires:

The Conservative government raised the possibility this month of going after the bureaucracy's pension plan as it looks for ways to deal with a ballooning deficit.

But senior civil servants are also concerned that too many bureaucrats retire in their mid-50s, causing staff shortages that are set to worsen in coming years.

Any major change to the Public Service Superannuation Act, however, will be stiffly opposed by unions, which are trying to contain the growing criticism of their members' plans in an era of dwindling private-sector pensions.

One of the most controversial aspects of the federal pension plan is the ability to retire with a full pension at age 55, after 30 years of service.

Federal officials expressed concerns that the provision is “reducing the pool of staff with experience,” with half of the executives in government eligible to retire by 2012.

Want to take a stab at which issue will become the next politcal powder keg in Ottawa and around the world?