Picking Up Canada's Pension Slack?
A briefing book prepared last fall for incoming Finance Minister Bill Morneau warns that Canada's spending on public pensions is dramatically lower than many other rich countries — even though private-sector pension coverage has deteriorated.In order for Canada's seniors poverty rate to stay low in the future, Bill Morneau better be able to convince his provincial counterparts next week to enhance the CPP once and for all.
The document, obtained by The Canadian Press, said that between 1991 and 2013, private-sector pension coverage fell from 31 per cent to 24 per cent.
But at the same time, the document suggests the federal government is not picking up the slack.
Canada spends "significantly" less on publicly funded pension support — through programs such as the CPP/Quebec Pension Plan, Old Age Security and the Guaranteed Income Supplement — than other OECD countries, the briefing states.
A chart in the briefing binder projected Canada to rank No. 17 out of 20 countries in 2015 for public pension spending as a percentage of gross domestic product, with just over five per cent. It said the average OECD spending was projected to be 9.5 per cent of GDP.
The document also highlighted concerns that younger Canadians aren't saving enough for their eventual retirement.
And while the number of private-sector pensions rebounded after the mid-2000s for young adults, there was a shift away from the more-desirable defined-benefit plans, said the heavily redacted note obtained under the Access to Information Act.
Between 1991 and 2013, defined-benefit coverage dropped to 11 per cent from 26 per cent, the document said. Meanwhile, a chart in the briefing binder showed that the percentage of defined-contribution plans had gradually increased.
Finance ministers meet next week
The adequacy of pension plans will be front and centre for Morneau next week when he meets with his provincial and territorial counterparts to discuss the possible enhancement of the Canadian Pension Plan.
During those talks in Vancouver, Morneau will push the federal Liberals' quest to persuade enough provinces and territories to reform the CPP. A change would require support from seven of the 10 provinces representing two-thirds of the country's population.
Any boost to CPP would be part of a long-term plan to address concerns about future generations of retirees rather than providing help for today's seniors.
In fact, Morneau's briefing document also included data showing that Canada's retirement income system has been effective in reducing poverty among seniors.
It cited Statistics Canada data that found the share of seniors living in low-income families plummeted from about 29 per cent in 1976 to 5.2 per cent in 2011. Older Canadians fared better than the overall population, which had a low-income rate of nine per cent.
The briefing also said seniors poverty was concentrated among single people living in large urban areas, such as Toronto, Montreal and Vancouver.
Canada's seniors poverty rate was also lower than many industrialized countries, the note said. The document included a chart that showed Canada was ranked No. 3 in 2013 among 14 OECD countries in terms for its seniors poverty rates — the average was 12.8 per cent.
Of course, not all Canadian seniors have left the workforce.
The document pointed to the labour-force participation rate of Canadians aged 55 to 74, which rose from about 30 per cent in 1995 to over 47 per cent in 2014. The OECD average in 2014 was 41 per cent.
The briefing note also said that the country's aging population underscored a need to increase job-market participation among older workers because the decline of working-age Canadians "will put downward pressure on economic growth going forward."
The sad reality is we're living in DC not DB world, and that has all sorts of implications. People aren't saving enough for retirement, they end up having to work longer out of necessity not choice (if they can and are lucky enough) and if they don't, they risk outliving their savings. Moreover, their retirement accounts are pretty much left at the mercy of public markets and brokers and mutual funds which charge them fees which take a big bite out of their returns over the years.
Ontario has taken the lead in terms of introducing a supplemental pension should the enhanced CPP option fail. The ORPP isn't an impediment to an enhanced CPP but it shows why such a course of action makes sense boosting the retirement system and overall economy.
Of course, there are plenty of critics who argue against enhancing the CPP. The Fraser Institute (they just don't give up) just released five myths on the Canada Pension Plan which you can watch below. I suggest you ignore pretty much everything that comes out of the Fraser Institute, it's complete nonsense (read my comment on why Canadians are getting a good bang for their CPP buck).
Then there are other think tanks who think the problem isn't with CPP but workplace DB pensions. CTV News reports, No need to raise workplace pension contributions:
A new study says automatically raising workplace pension contributions in tandem with the cost of living is unnecessary because Canadian retirees increasingly tighten their purse strings after they reach 70 years old.You can read the full report here. I respect the C.D. Howe Institute more than the Fraser Institute but any author who claims we should lower pension contributions at company DB plans so Canadians can put more money into paying off mortgages on their outrageously overvalued homes needs to have his head examined. I also don't buy that we need to scale back inflation protection on the CPP.
The report by the C.D. Howe Institute think tank also argues that tying up the extra funds in pension contributions is an inefficient use of scarce financial resources for Canadians.
The research says lowering pension contributions for company plans - such as defined-benefit vehicles - would put more money in the pockets of families that are raising kids and paying down mortgages.
The study is released a few days before federal Finance Minister Bill Morneau is scheduled to meet his provincial and territorial counterparts to continue quickly evolving discussions on how to boost the Canada Pension Plan.
The federal Liberals have pledged to work with the provinces and territories to enhance CPP. They argue that expanding CPP across the country will ensure more Canadians have a secure retirement.
The C.D.Howe paper's recommendations are mainly targeted at private pension plans - not the CPP.
Study author Frederick Vettese writes that CPP contributions should not be subject to any contribution reductions since the public plan is designed to cover basic needs like food and shelter for middle-income workers after they retire.
"Retirees in Canada and other developed countries demonstrate a strong tendency to reduce their out-of-pocket spending in real terms starting at around age 70 and accelerating at later ages," wrote Vettese, chief actuary for the Morneau Shepell human resources firm, which was founded by Morneau's father.
"This decline can hardly be attributed to insufficient financial resources because older retirees save more on average than people who are still working."
Given this, Vettese added that indexing pension contributions to the cost of living could be reeled back without sacrificing consumption later in life.
The study pointed to a 2011 research paper that found the average Canadian household headed by someone aged 77 spent 40 per cent less than one headed by someone who was 54.
A U.S. study, also cited by the C.D. Howe report, said that between the ages of 60 and 80 Americans spent at least 50 per cent less on purchases such as cigarettes, airline tickets and camping equipment. The same study found that between the same ages people spent at least 50 per cent more on items such as hearing aids, prescription drugs and funeral services.
Until the election last fall, Bill Morneau was executive chairman of the company, which describes itself as Canada's largest provider of pension-administration technology and services.
All these think tanks should just step back and allow real pension experts like Bernard Dussault, Canada's former Chief Actuary, to work on policy recommendations.
Below, the Fraser Institute's five myths behind the push for expanding the CPP. Like I said, ignore pretty much anything that comes out of the Fraser Institute, it's grossly biased nonsense.
If you want to understand why we need to enhance the CPP for all Canadians, go here and get informed. After a lifetime of hard work, no one should have to struggle just to make ends meet. Watch their commercial below and see why it’s time for a better Canada Pension Plan for all (this commercial is just sad).
And since it's Friday, I'll end by looking at the lighter side of retirement with John Oliver, host of Last Week Tonight. Watch the clip below, it's funny and very informative. Have a great weekend!
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