Canadians Heading for a Retirement Crisis?
The warning bells have been clear, but they are growing increasingly louder: Canadians are not saving enough for retirement, and they’ve got to do something about it, quickly.None of this is news to me. I started this blog back in June 2008 knowing full well Canada and the rest of the world is heading for a severe retirement crisis. Politicians are only now waking up to this new reality.
“I think there’s a broad consensus that we are heading for a retirement income crisis,” said Murray Gold, managing partner at Koskie Minsky law firm, and a pension specialist who advises the Ontario Federation of Labour.
“Two-thirds of the workforce doesn’t have any pensions, and the kinds of pensions we have aren’t as good as they were 20 years ago,” he said.
Since the 2008 financial crisis, the provinces have called for reforms to boost payouts under the existing Canada Pension Plan, but the federal government has balked at the idea.
Premier Kathleen Wynne has said Ontario will go it alone and develop its own pension plan, with details to be revealed in this spring’s budget. It is expected to be a key plank of the Liberal platform if an election is called.
Nearly 1.3 million workers in Ontario do not have access to any type of employer-sponsored workplace pension. In Canada’s private sector, only one person in five has a workplace pension.
That has resulted in an erosion of pension coverage, and an erosion of quality, Gold said, raising questions about whether future retirees will be able to maintain their standard of living. If not, there would be a domino effect that would hurt the overall economy.
The oldest Baby Boomers are turning 68, some happily retired with company pensions and good nest eggs, thanks to equity in booming housing markets. But others are struggling, opting to work longer, even after the typical retirement age of 65.
The picture is even bleaker for the Boomers’ children and grandchildren, who are trying to find that first job, or jumping between jobs, which in all likelihood don’t include a company pension, and certainly not a defined benefit plan.
In recent years, companies have been getting out of defined benefit plans, which offer guaranteed payouts at retirement regardless of how investments performed. Instead, employers that do offer a pension are often moving to defined contribution plans, where employees essentially manage their own plans, much like a RRSP, with no promised set payout at retirement.
“People have now learned the ropes enough to know that there’s something at stake here, which is my retirement security or my kids’ retirement security,” said Susan Eng, vice-president of advocacy for CARP, formerly known as the Canadian Association of Retired Persons.
Eng says her members are watching their kids trying to eke out a better life, but can’t find work or can’t save enough. So those approaching retirement age end up helping the next generations financially.
“Our members are the people who will never benefit from this (pension reform) themselves. It’s too late for them,” she said, adding they want to ensure a safety net exists for future generations.
With talk of a proposed Ontario pension plan expected to heat up in the coming months, here’s a look at proposals to fix our pension woes.
Enhanced Canada Pension Plan
Almost all Canadian workers contribute to the Canada Pension Plan, which pays out in retirement or if someone becomes disabled. Under the current funding model, CPP pays out a maximum annual pension of about $12,000, though many people receive far less.
Some have argued that boosting CPP contributions is the easiest way to raise overall retirement incomes, though critics say raising pensions for all, including the affluent, isn’t the best solution.
Business groups have warned that hiking premiums would hurt employers, and potentially impede job creation.
Even though provinces have pushed for enhanced CPP for several years now, the federal government has signalled it has no desire to go this route.
Little action is expected here, because any changes to CPP would require Ottawa’s backing, along with approval from at least seven provinces representing two-thirds of the country’s population.
Pooled Registered Pension Plans (PRPPs)
Instead of an enhanced CPP, Ottawa has passed legislation permitting pooled registered pension plans, as have a few provinces, such as Quebec, Alberta and Saskatchewan. These plans are managed by financial institutions, with participants selecting options that set contribution rates.
Unlike defined benefit plans, these do not pay out a guaranteed retirement income. The payout depends on how the pool’s investments perform.
Small- and medium-sized businesses say they favour this model because it offers flexibility.
“There is a certain elegance to them. They enable a degree of choice, but at the same time nudging people toward virtuous decisions,” said Josh Hjartarson, vice president of policy and government relations for the Ontario Chamber of Commerce.
Hjartarson argued that enhancing CPP is a blanket move that would benefit people who don’t necessarily need it, while PRPPs are the preferred option for pension reform for its members.
He said many employers would choose to participate in a PRPP as part of an employee retention strategy, though others may not be financially able to do so.
“Let’s be honest, particularly in the current climate, not every employer is in a position to do that,” he said, adding that employees could also benefit as they could opt out if they don’t want to join.
There isn’t agreement on whether employers who offer a PRPP should be required to contribute to the pooled registered pension plan. The Ontario chamber surveyed nearly 1,000 employers in February, of which 33 per cent said yes, while 48 per cent no.
Critics say these plans are similar to group RRSPs, which simply can’t get to the size and scale needed to deliver predictable pensions with low management fees.
A middle way
Keith Ambachtsheer, director of the International Centre for Pension Management at the Rotman School of Management, argues that lower-income earners and high-income earners are well-served by current programs.
“If you are neither rich nor poor, nor in the public sector, then (pensions are) something you should be interested in,” said Ambachtsheer, who says something is needed between PRPPs and an enhanced CPP.
He argues that families with an annual income in the $30,000 to $100,000 range are at greatest risk if there isn’t pension reform. Low-income earners can receive CPP, old age security, which is clawed back based on income, as well as the guaranteed income supplement.
Ambachtsheer has put forward a proposal, published by the C.D. Howe Institute, calling for such a middle way.
He proposes to replace 60 per cent of middle-income family earnings after retirement, which would take an additional 6 per cent of pay contribution rate above the current 9.9 per cent CPP contribution rate. These contributions would be split 50-50 between employer and employee (so 3 per cent each), and would be phased in over a number of years.
While employers complain this model would be too costly, Ambachtsheer says they just want to say no. “I don’t have a lot of patience for these naysayers,” he said.
He insists such a model can be created, noting that even in tight times, employers often make annual inflationary pay increases. So, for example, instead of giving a 2 per cent wage increase, an employer could afford a 1 per cent contribution to pensions and then give 1 per cent in salary, and gradually increase pension contributions, he said.
Ontario pension plan
Details of what the province will propose for its made-in-Ontario solution are under wraps, though the plan has already drawn interest from provinces such as Manitoba and Prince Edward Island, whose populations are too small to go it alone.
Ambachtsheer argues that voluntary programs clearly don’t work, noting Canadians aren’t putting money into their RRSPs and tax-free savings accounts even though the tax incentives are there.
He says the keys to any Ontario pension plan are that it would need to ensure mandatory participation, and that it would need to be independently managed to keep fees lows, possibly modelled on the CPP investment board or the Ontario Teachers’ Pension Plan.
“Let’s get people saving, and do it in a way that is low-cost and professionally managed,” Ambachtsheer said. “We know how to do this. There’s nothing to be invented.”
The advantage is, given the working population of Ontarians, a pension plan could easily get to a size that would give it the advantages of scale. It would be much bigger than plans such as Teachers’ or the Healthcare of Ontario Pension Plan (HOOPP), and could invest in ways that would deliver higher returns than small plans or individual investors can get.
Savings and discipline
CARP’s Eng says the hard truth is that people must realize they have to ante up the cash. The general rule is that you need to contribute 18 to 20 per cent of income to earn a pension that pays 70 per cent of pre-retirement income, she says.
“It’s almost 18 per cent, split between employer and employee, that would otherwise be cash in your jeans,” Eng said. “Are people prepared to pay what it takes? I think we are getting close. There will be some sticker shock.”
She says those who envy Ontario teachers or other public sector workers with their good pensions need to remember they are making hefty contributions. Teachers contribute about 12 per cent of their income, matched by their employers.
But telling people they need to save more isn’t working, given Canadians aren’t taking advantages of existing RRSPs and TFSAs. And even if they are, individuals can’t easily invest in the same way as big pension funds, getting good returns with low fees, compounded over years.
Ambachtsheer blames inertia, saying only a small minority of people carefully plan their future, noting most are just dealing with busy lives without time to deal with retirement plans.
But given that 80 per cent of employees in the private sector do not have a pension, the urgency is growing.
“The societal question is, do we create a framework?” he said. “Is there some public initiative that would help these people?
“It’s just a matter of whether we can collectively wrap our heads around actually doing it.”
What do most Canadians do? If they are able to save — which isn't easy after they pay housing, food, energy, cars, clothing, schools and other expenses — they shove their money in some shitty mutual fund their bank is peddling, effectively raping them on fees (1% or 2% annual fee compounded over many years takes a huge bite out of their retirement savings).
In the U.S., a new study finds that the typical 401(k) fees — adding up to a modest-sounding 1% a year — would erase $70,000 from an average worker's account over a four-decade career compared with lower-cost options. To compensate for the higher fees, someone would have to work an extra three years before retiring. When it comes to retirement, most people need a reality check on pensions.
Go back to read Jim Keohane's speech at the HOOPP conference on DB pensions. Also, go back to read my comments on whether Canada is on the right path. We have serious economic challenges ahead, which is why I believe it's high time our politicians get cracking on bolstering retirement incomes by bolstering defined-benefit plans, especially for middle income earners struggling to save for retirement.
Is Keith Ambachtsheer right? Yes and no. Low income Canadians are served well with the current system and would be worse off with enhanced CPP but for the rest of the population, including high income earners, there is no question that enhanced CPP is the way to go. Ask any doctor in Ontario if they can have a DB plan managed by HOOPP instead of shoving it in some shitty mutual fund and they will tell you "hell yes!!."
At the very least, the federal government should revise RRIF rules not to penalize older Canadians who are working well past the age of 65 years old. The current rules are dumb, forcing all Canadians past a certain age to convert their RRSPs into RRIFs and then withdraw money out of their RRIF account even if they took a hit during the financial crisis and are still working and need to save more for retirement.
Below, a 2009 report which explains America's 401(k) nightmare. As the default retirement plan of the United States, the 401(k) falls short, argues CBS MoneyWatch.com editor-in-chief Eric Schurenberg. He tells Jill Schlesinger why the plans don't work. The same thing is happening in Canada, which is why now is the time to act to bolster defined-benefit plans for many Canadians that are staring at a retirement crisis.