The Pension Conundrum?

Stefania Moretti of QMI Agency reports in the Toronto Star, The pension conundrum:

Recent calls to boost the Canada and Quebec Pension Plans will further burden business owners and push wages down as much as 2.5%, according to a new report.

The Canadian Federation of Independent Business said it has studied recent proposals from the Canadian Labour Congress and others to up CPP and QPP benefits and premiums.

The CLC proposal, it found, will force pay down as much as 2.5% in the long term.

With Canadians more indebted than ever, retirement funding has become a hot-button issue, with many claiming the CPP and QPP aren’t enough to sustain quality of life, especially for private sector workers. The average retired Canadian man gets $6,800 a year from the CPP, while the average woman gets just $4,700.

Canada’s finance ministers have received a flurry of proposals on how to revamp the system ahead of their meeting on retirement income in December.

“One way or another everybody has to save more or we’ll be facing a crisis,” said Jeff Atkinson, a spokesperson for the CLC.

The CLC has proposed gradually doubling the benefits plan with premium increases of 0.47% in each of the next seven years, which works out to an additional $3.57 per week for a worker earning $47,200.

But employers, who already have the burden of funding employment insurance, would have to match the new premiums and that will drive wages and even job growth down, the CFIB said.

And the spending power that comes along with increased savings won’t be fully realized for 40 years, it said.

"The other important lesson of this exercise is to shed light on the fact that the bulk of the negative economic impacts would be the result of increases to employer-paid premium costs," said CFIB chief economist Ted Mallet.

Catherine Swift, president of the CFIB, said the real problem is the gap between private and public sector pensions.

"Taxpayers struggle to save for their own retirement, in part because they are paying dearly for the pensions of civil servants,” she said.

The CFIB says that if premiums must be raised, then they should be raised on the employee side only.

"As employers pay 60% of Employment Insurance premiums compared to 40% for employees, perhaps employees should pick up more of the cost of CPP, leaving employers' premiums at the current level,” she said.

CLC President Ken Georgetti said unionized employers and the public sector have done their part to ensure better retirement income and now it’s time for the private sector to step up to the plate.

“If you follow Swift’s argument to its illogical conclusion, she would argue that everybody should be as poor as the poorest private sector worker. That’s not the goal,” he said.

Employers who already offer a pension through an Registered Retirement Savings Plan could transfer some payments to the CPP since it is tax deductable and offers a better return for workers, he added.

I have to agree with Ken Georgetti on this one. The goal isn't to impoverish everyone, but to increase retirement security among as many workers as possible in both the public and private sector.

And here is an additional thought. Maybe the gap between private and public sector pensions exists because the latter are better managed. Yes, public sector pensions are more generous, but I happen to believe that for the most part, they're better managed plans.

Finally, Susan Eng, VP Advocacy at CARP, sent me Joe Friesen's Globe and Mail article, Number of seniors living in poverty soars nearly 25%

The number of seniors living in poverty spiked at the beginning of the financial meltdown, reversing a decades-long trend and threatening one of Canada’s most important social policy successes.

The number of seniors living below the low-income cutoff, Statistics Canada’s basic measure of poverty, jumped nearly 25 per cent between 2007 and 2008, to 250,000 from 204,000, according to figures released on Wednesday by Campaign 2000. It’s the largest increase among any group, and as the first cohort of baby boomers turns 65 next year, could place increased pressure on families supporting elderly parents.

Economists say women make up as much as 80 per cent of the increase in seniors poverty. Armine Yalnizyan, economist at the Canadian Centre for Policy Alternatives, said more women than men were living close to the poverty threshold before the financial crisis took hold in 2008, and, because their retirement savings tend to be smaller, were more likely to slip below the low-income cutoff. Men over 65 are also twice as likely as women over 65 to have a job. By January, 2009, there were 23,000 fewer women over 65 working than there were seven months earlier, while the number for men changed very little, Ms. Yalnizyan said.

“My guess is that the majority of women [who are still] working over 65 are not carrying on with their career, but trying to have a little more comfort in their lives. They were probably never too far above the poverty line, whatever line you pick. When those jobs are gone, more of them are struggling to make ends meet,” Ms. Yalnizyan said.

The rise in poverty among seniors poses particular problems for their adult children, who will be expected to bridge financial gaps for their parents while supporting their own families. This so-called “sandwich generation” is often caught with the twin pressures of having children in higher education and parents requiring additional care for failing health, according to Laurel Rothman, co-ordinator of the Campaign 2000 report card on child and family poverty.

She said the trend is particularly hard on new Canadians who have sponsored their parents to join them in Canada. Many of those parents have been able to work for only a few years in Canada before retirement, and so receive very little in Canadian pensions.

“In Montreal, Toronto and Vancouver, ethno-racial newcomers are particularly a concern,” Ms. Rothman said. “We see it all the time at Family Service Toronto, people who come here that are sponsored [by their family members]. It may be someone who puts in five or 10 years of work [in Canada], but they don’t get full Canada Pension Plan. ... And their cost of living has gone up.”

The jump in poverty among seniors is unusual because Canada’s success in tackling this issue has been cited as perhaps its single most successful policy intervention. According to figures cited in a 2009 Conference Board report, Canada’s rate of seniors poverty was as high as 36.9 per cent in 1971. The government, in an effort to tackle the problem, had a few years earlier introduced the Guaranteed Income Supplement and the Canada Pension Plan. By 2007, the rate of poverty among seniors had plummeted to 4.9 per cent, before rising to 5.8 per cent in 2008.

The Canadian data are at odds with what’s happened in the United States, where the poverty rate of 9.7 per cent among seniors did not change between 2007 and 2008, despite the financial collapse. Ms. Yalnizyan said that could be explained by the time lag between the beginning of the economic upheaval in the United States and its eventual impact on Canada.

The Campaign 2000 report also says 9.1 per cent of Canadian children were living in poverty in 2008, down slightly from the year before, but nowhere near the goal of eliminating child poverty set by Parliament in 1989.

Susan Eng sent me her response to this article, which she sent to the Globe and Mail:

The 25% increase in poverty among Canadians 65-plus is no surprise. That despite being warned, governments have not acted to prevent it is the real story.

The dramatic decline in seniors’ poverty rates over the last 20 years is largely attributed to the CPP, OAS and GIS. But the CPP has “matured” – retirees have just started receiving their full entitlements after 40 years in the workforce – so no more improvements from this source. OAS and GIS have not kept pace with the true increase in cost of living – the indexing formula excludes food and energy costs.

The differential impact on women is also not news. In and out of the work force with child rearing and caring for their parents or spouses, the women now over 65 had lower career earnings and more likely, no workplace pension.

Instead of helping, government rules actually exacerbate the problem. Applying late for OAS, GIS or CPP, limits you to11 months in retroactive payments – of your own money. Eighteen percent of women over 65 who live alone live in poverty. It didn’t help that the OAS spouse allowance for those aged 60-64 was not available to them.

Where’s the money to increase OAS and GIS to come from? The $2 billion saved when the Afghan mission ends, one or two jet fighters and their maintenance contracts, fundamental restructuring of health care delivery– take your pick. But the ignoring the issue won’t make it go away. Thanks for the story.

Canada's finance ministers can no longer ignore this problem. There is no pension conundrum, only pension poverty which will get worse over the next decade. In fact, I had a conversation with a colleague of mine today and we chatted about how quantitative easing (QE) may be the only option, but it will exacerbate the divide between the financial economy and the real economy. It's great for banks, hedge funds, and private equity funds, but it remains to be seen whether the wealth will trickle down to the working class. In the meantime, pension poverty is getting worse and policymakers need to implement policies that will protect society's poor, elderly and most vulnerable from the vagaries of Casino Capitalism.