Staving Off the Pension Crisis?
Mr. Crocker is absolutely right on the benefits of DB plans. Of course, HOOPP is a private DB pension plan, which is why he is calling on governments to enable the formation of large, multi-employer defined benefit pension plans to provide pensions for workers in the private sector.
Canada is headed for a retirement income crisis. The last 20 years have seen a steady shift of retirement income risk from employers to workers, and studies show Canadians are not saving enough for retirement on their own.
According to experts, you need about $20 of savings for every dollar of retirement income you want to receive. So if you seek an income of $50,000 a year, you need to save $1 million. If you want $25,000 a year, you need $500,000. Yet the average Canadian has only about $60,000 in his or her RRSP at the time of retirement. RRSPs simply aren’t working for most Canadians.
As a result, I worry that as a country we are undoing decades of success at raising the standard of living for retired people and shrinking the scourge of elderly poverty.
Canadians share my concern. According to research conducted for HOOPP this month, 84 per cent of Ontarians are concerned about not having enough money for retirement. And 58 per cent believe it is principally the role of government — not individuals — to ensure Canadians have adequate incomes in retirement.
The pension puzzle: The issue is adequacy, not coverage
The magnitude of the problem is clear. However, the best, and perhaps most obvious solution — the defined benefit pension (DB) plan — is being overlooked or prematurely dismissed.
My experience at HOOPP has convinced me that defined benefit plans are viable, affordable and must be an integral part of providing retirement income security for Canadians in both the public and private sectors. Our members are not the rich of society. They are the nurses and other working people who provide us with health care. Yet they have peace of mind while working — and a decent standard of living while retired — because they have an annual retirement income that is both adequate and reliable.
Recent years have seen a shift to defined contribution (DC) plans, where employees are responsible for choosing their own investments, with no promise of exactly how much will be there for them upon retirement. Despite the significant downside for employees, DC plans have become popular among employers due to the perception they are more affordable.
It’s time to debunk the affordability myth. A 2008 study by the U.S.-based National Institute on Retirement Security found that DB plans are more affordable than DC plans, assuming the same pension payout. In both types of plans, the inputs from employer and employee are the same, but DB plans yield pension results that are three times or more those of a typical DC plan because DB plans have professional investing, pooled longevity risk, and are ageless — designed to run over the long term.
With a DC plan, the employee pays just as much in contributions — as does the employer — as they would in a DB plan. The core issue is the adequacy of the pension that is offered.
A typical DB plan’s goal is to provide replacement income equal to 67 per cent of working earnings. There’s no such target for a DC plan. They typically generate a pension of about 20 per cent of working earnings.
More DC plans, or their variants, may solve a narrowly defined “pension coverage” problem in Canada. But if one is looking to solve the retirement income crisis that looms ahead, DC plans will not cut it. Well-run defined benefit pension plans will.
The solution: Enable multi-employer private plans
That is why I am calling on governments to enable the formation of large, multi-employer defined benefit pension plans to provide pensions for workers in the private sector.
These funds could be set up either by sector, industry or region. Employees would contribute up to 10 per cent of their salaries to the plan, and employers would match their contributions.
The multi-employer model provides a number of significant advantages. The liability would not be carried on any one company’s balance sheet, making participation more attractive for private corporations. No longer would the full weight of funding be on one set of corporate shoulders. The most important would be meaningful replacement income for every employee upon retirement — not a process where the employee is left on his or her own.
There are two public policy barriers that must be overcome. First, government must change pension funding rules that allow employers to stop contributing when times are good, thus creating problems when the economy worsens. Second, we must abandon the use of “point-in-time” accounting for valuations of pension plans. While plans are designed for the long term, the use of this “snapshot” approach can lead a plan to be found insolvent even when it can pay everyone their entitled benefits. Yet the plan must still “fix” the solvency — spending time and effort on an artificial, technical problem.
Providing every citizen with a livable retirement income will be critical to both Canada’s prosperity and our social cohesion in the 21st century.
The good news is that the solution is in our grasp. Governments must act now to get the rules right, and to show leadership in encouraging the development of new multi-employer DB plans to serve more Canadians.
Together, we need to fix our pension system so that it looks after the retirement income needs of our citizens. If we focus on the right issue — adequacy — we can build a sustainable retirement system that makes sound business sense, while meeting allowing Canadians to retire with dignity and independence.
But what if we were able to offer every Canadian an affordable public defined benefit pension plan? Why not allow private companies to focus on their businesses and leave pensions in the public domain? Companies can still contribute part of the money but they would be offloading the risk of a pension deficit - or worse in the case of a bankruptcy - to the federal or provincial government.
I am tossing ideas out here. Sure, some companies like CN might refuse because they're happy with the way their pensions are being managed, but most other large companies would probably jump on the idea of offloading their pension risk to a universal public pension plan.
If this idea is too radical, then I am all for large, multi-employer defined benefit pension plans to provide pensions for workers in the private sector. Again, we need to make sure these plans are well governed, but this idea also has merits.
It's just that I prefer pushing the envelope even further than Mr. Crocker and saying that pensions need to be a public good, much like we treat healthcare in Canada. There will always be a private system but the dominant system providing pensions for Canadians should be public.
This is my ultimate vision for improving our pension system and I believe we have the collective resources and brain power to achieve this social goal. So let's get on with it. The longer we wait, the harder it will be to create a sustainable retirement system allowing Canadians to retire with dignity and independence.