|
© Copyright 2000 Rogers Media. The following article first appeared in the April 2001 edition of
BENEFITS CANADA magazine.
The retirement crunch
Demographics and early retirement packages are creating an employment shortfall. An innovative
pension plan is one incentive that could keep employees on the job.
By Brent Simmons
Teacher retirement is the most pressing issue for school boards across the country, according to a survey
conducted by the Canadian Teachers' Federation. More than 15,500 teachers retired during the past two years in
Ontario, alone, and over four in 10 teachers in every region of the province are expected to retire in the next
decade. The pool of talent to replace these retirees is quickly depleting.
Demographics play the biggest role in the teacher shortage--but the design of the Ontario Teachers' Pension
Plan has also contributed to the problem. Ontario teachers have an excellent pension plan, to which they
contribute a significant portion of their salaries. The plan has also performed well over time and has
generated a sizeable surplus.
In 1998, the Ontario Teachers' Federation and the provincial government were able to devote $2.2 billion of
this surplus to improving benefits. These improvements included an early retirement window that allowed
teachers whose age plus years of service added up to at least 85 to retire early with no reduction to their
accrued pensions. This year, the 85 factor is expected to become a permanent feature of the plan.
Other groups--even those without pension plans as good as teachers--are also leaving the workforce in
record numbers. The Urban Futures Institute estimates that 70,000 Canadian nurses--more than a quarter of
the current nursing workforce--will retire over the next five to 10 years. This comes at a time when the
Canadian population is aging, and the demands for nursing care are rising.
How will organizations that need nurses meet their staffing needs? How, for that matter, will employers who
need engineers, auto workers, electricians and accountants ensure that they, too, will have the talent
necessary to run their businesses?
There are no easy answers to these questions, and the solutions vary widely depending on individual sectors
and companies. However, there are some general conclusions that can be drawn to help employers prepare for
the future.
DEMOGRAPHIC DILEMMA
The most important factor at play is Canada's baby boom phenomenon. Currently, about a third of the
population is between their early 30s and early 50s--prime working years. Over the last five years, on
average, about 225,000 Canadians retired each year. This number is predicted to grow to 370,000 retirements
per year by 2010, and to 425,000 retirements per year by 2020.
To exacerbate this situation, the U.S. is experiencing a similar (albeit not as severe) demographic
challenge. Our southern neighbours may look north for younger workers to fill the labour gap that has been
left by their retiring employees. If the relative tax rates and exchange rates between our two countries
remain the same, it will only make matters worse.
There is some hope on the seemingly bleak horizon. Canadians are having families later in life and living
longer. The desire or ability to stop working may decrease while children are still at home or in need of
their parents' financial assistance with the cost of post-secondary education.
There is already some evidence of a growing trend towards working after traditional retirement years.
According to Canadian author David Foot in Boom, Bust & Echo 2000, more than one million people
over the age of 55 have come out of retirement in the U.S. since 1995.
THE PENSION PLAN SOLUTION
What can plan sponsors do to address the future retirement boom? They can start by mapping out--to the
greatest extent possible--their human capital needs 10 and 20 years down the road. Employers need to
identify what type of employee they will require, where they'll find these individuals as well as whether
the retention of older employees is a desirable goal. The organization can then position itself to be as
flexible and creative as possible in its approach to retaining and attracting talent.
The pension plan is an important tool within this integrated human capital strategy. As noted, company
plans with generous early retirement options provide a disincentive to older workers to remain employed.
Early retirement provisions subsidize the benefits of employees who use them. In general, the earlier an
employee uses these retirement benefits, the bigger the subsidy from the plan.
Should employers amend their plans to remove generous early retirement provisions? This is a dangerous road
to travel with the potential for litigious potholes. Still, there have been plans where the early
retirement provisions were made less generous while other plan benefits were improved.
The net effect was that the changes were cost neutral to the plan and all plan members received improved
benefits--not just those who would have been eligible for early retirement. It is important to remember
that some form of grandfathering will be required for members who were eligible for the original early
retirement provisions.
Flexible pension plans are especially good at encouraging early retirement. These plans allow employees to
contribute to an account which they use at retirement to buy ancillary benefits such as improved early
retirement subsidies, bridging benefits or indexing.
If employees cannot spend all of the contributions in their accounts upon retirement then they forfeit the
leftover contributions.
As the improved early retirement subsidy is by far the most valuable ancillary benefit, a member delaying
his or her retirement will most likely end up having to forfeit contributions. Companies could consider
reimbursing employees in this situation with money from outside the flexible pension plan.
What can be done to encourage employees to keep working by compensating them for the value of the early
retirement provisions that they forgo? Is there some way, for example, to replace bridge benefits that
would be forgone by employees choosing not to retire early?
Based on current legislation, such compensation would likely have to come from outside the pension plan. If
legislation were to change, then actuarially increasing an employee's pension at retirement to recognize
the value of the early retirement provisions not elected might become an option. Such an option could be
cost neutral from the pension plan's point of view with respect to employees who intend to retire early.
What can be done to encourage employees who make use of the plan's early retirement provisions to return to
work? Current rules prohibit employees from receiving a defined benefit (DB) pension while accruing a
pension under a DB provision of the same or related pension plan.
Perhaps employers could look at offering a defined contribution provision or a group registered retirement
savings plan to rehired employees. The employees would then be able to collect their pension, earn
employment income and accrue additional pension benefits.
Thought should also be given to what type of pension plan older employees prefer. By offering a plan that
is tailored to older workers, an employer may achieve a strategic advantage in recruiting. At the same
time, the organization must be concerned about attracting and retaining younger workers. Multiple
plans--one for older, one for younger and another for rehired workers--may make sense.
GOVERNMENT AID
In 1995, there were five Canadians between the ages of 20 and 64 for each person aged 65 and over. By the
year 2030, this ratio will have been cut in half.
Government solutions to address the costs associated with the aging population might include reducing
benefits to seniors, taxing working citizens at much higher rates or implementing measures that will stop
the tax base from shrinking.
The wholesale cutting of seniors' benefits doesn't seem particularly likely given Ottawa's historical
aversion to angering this group. When the Canada Pension Plan (CPP) was last reformed, the additional cost
was borne by all stakeholders with the exception of current retirees. Given that seniors are more likely to
vote than working Canadians and have more time to lobby, Ottawa's attitude towards preserving seniors'
entitlements is not surprising.
A hike in personal income tax rates doesn't seem to be likely either in the short term given recent
tax-cutting rhetoric. Nor does it seem prudent in the long term, considering the fact that the U.S. is
continuing its tax relief efforts and may be eyeing this country as a potential labour source.
The most practical and viable alternative is clearly to stop the Canadian tax base from shrinking. One way
to do this is to shift the focus of the tax system away from payroll and income taxes to consumption and
property taxes. In all likelihood, the plan would also include increased immigration and government
programs that encourage Canadians to work longer.
Some changes to the operation of existing government programs would also help. A study by the C.D. Howe
Institute, Flexible Retirement as an Alternative to 65 and Out, discusses the tax disincentives to
working beyond age 65. Most of these involve clawbacks to Old Age Security and the Guaranteed Income
Supplement (GIS) that result in actual punitive rates of taxation for income earners over age 65. The GIS,
a safety-net program for low-income seniors, has a clawback rate of 50%.
The study points out that for a low-income Ontario senior receiving both the GIS and the Ontario program of
guaranteed annual income, the effective tax rate on any income is a staggering 100%.
Another government program that could be altered is the CPP. These benefits are payable once the recipient
substantially ceases working. The earliest commencement date is set at age 60 and the latest commencement
date is age 70.
Canadians who start receiving CPP benefits before age 65 receive a reduction in their benefits. However,
this reduction is less than the value of the additional benefits they receive by starting early.
Canadians who delay receiving CPP benefits until after age 65 receive an increase to their benefits. But
this increase is less than the value of the benefits they give up by delaying commencement. Clearly, CPP
currently encourages recipients to retire early. Its design may also need to be reconsidered.
LOOKING TO QUEBEC
One promising idea that was introduced by the Quebec government in 1997 is the concept of a phased-in
retirement program. Each employer has the option of offering this program to their employees.
Under Quebec legislation, a pension plan member who participates in a phased-in retirement program
involving reduced working hours can receive an annual payment from his or her pension plan to make up for
part of the resulting pay loss. Additional accruals within the pension plan may continue.
The Quebec Pension Plan (QPP) even allows an employee whose working time is reduced because of phased-in
retirement to earn QPP entitlements based on a deemed (higher) rate of remuneration if the employee
contributes to the QPP based on the deemed rate of remuneration. The employee must have consent from his
employer as the organization matches the higher contributions.
In addition, deferred vested members or retired plan members who have not yet elected to start receiving
pension payments may choose to receive an annual lump sum payment from the pension plan in each year before
pension payments commence. The amount of their eventual lifetime pension is reduced accordingly.
Phased-in retirement has not been as widely adopted by Quebec employers as originally hoped, and the
programs that do exist usually have constraints regarding the number of employees that can participate.
Possible explanations include the fact that many employers find it challenging to allow employees to work
part time.
As well, unions have not pushed to negotiate phased-in retirement during collective bargaining. Regardless
of these obstacles, some variation on the Quebec legislation seems like a step in the right direction in
providing employers and employees with more flexibility in determining how and when workers retire.
NEXT STEPS
So, where do we go from here? The retirement of the baby boomers over the next three decades will bring
changes to the Canadian labour market, which cannot, at this time, be predicted with certainty.
The eventual outcome of this retirement crunch will depend on many factors, including the actions of our
governments.
Regardless of the uncertainty, each employer should adopt a proactive stance. Organizations will need to be
as creative and flexible as possible in shaping their integrated human capital strategy. An analysis of the
intended role of the organization's pension plan and its ability to meet the employer's needs should be one
of the first steps.
Brent Simmons is an actuary and a pension consultant with William M. Mercer Ltd. in Toronto.
brent.simmons@ca.wm- mercer.com.
|
News
News
