Pension plans and the issue of who has (or does not have) them has become a hot topic in Canada. As the populations of developed economies—including Canada—grow older and the ratio of workers to retirees drops, it is natural that governments and individuals start to discuss how the older members of the population will provide for themselves post-retirement. This topic has been examined by many federal and provincial expert panels and has been factored in to the wide-ranging discussion on expanding the Canada/Quebec Pension Plan (C/QPP). There have been two recent developments in this regard: the release of the proposed Framework for Pooled Registered Pension Plans (PRPPs) by the federal government in December 2010 and the recent Quebec Budget.
PRPPs are intended to provide for a new type of DC/capital accumulation plan. Employer participation would be optional, though federal or provincial governments could mandate it. While employees can opt out of the PRPP, their contributions will be locked in (with exceptions for situations such as financial hardship) but portable if they do choose to participate.
The 2011 Quebec Budget, tabled on March 17, 2011, included provisions to gradually increase QPP contributions from 9.9% to 10.8% between 2012 and 2017 in an attempt to address demands imposed by its rapidly aging population, as well as changing the adjustment factors related to early and late retirement. Quebec also announced its intention to set up a voluntary retirement savings plan that will be compulsory for all Quebec workers and self-employed individuals who do not opt out. It is similar to the PRPP.
But with Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and C/QPP, why is everyone concerned? Well, the chart below says it best. More than 50% of Canada’s working population has no form of pension coverage, employer-sponsored or private. As you can also see, the percentage of workers who have pension coverage has been steadily decreasing.
Participation rates in employer-sponsored pension plans are not equal in the public and private sectors. More than 75% of public sector workers are members of a DB pension plan, while only a very small percentage has no pension coverage at all.
This contrasts with private sector employees, the majority of whom have no employer-sponsored pension plan coverage. The chart below shows that less than 25% of private sector employees are members of a DB plan, while approximately 70% are not members of any employer-sponsored pension plan.
We believe private savings, often known as third-pillar savings, are an important component of the retirement income system. In reviewing the Statistics Canada report Participation in Private Retirement Savings Plans, 1997–2008, we find that participation rates are evenly split by gender but do vary significantly by income and age.
In 2008, 18% of 15- to 24-year-olds participated in private retirement savings plans, while participation by 25- to 34-year-olds increased to 52%. Participation levels continue to increase until age 65 when, not surprisingly, they decline significantly. When we view participation by the same age groups in 2008 for employer-sponsored pension plans, participation rates drop to 12% and 34%, respectively.
The numbers become even more startling when we turn to income as a barometer of participation. Among the lowest 20% of Canadian income earners in 2008, only 9% participated in private retirement savings plans, and only 6% participated in employer-sponsored pension plans. Participation rates by the next lowest 20% of Canadians (by income) improved to 29% for private savings plans and 15% for employer-sponsored plans. Just what did these people earn? According to Statistics Canada, 73.9% of Canadians who filed tax returns in 2009 earned less than $50,000. This would certainly encompass the lowest 40% of income earners just mentioned and is a key reason why participation rates are so low. For completeness, the highest 20% of income earners (who represent less than 0.7% of the Canadian population) had a participation rate in excess of 65%.
We agree with the federal government that, in order to improve private retirement savings participation rates (and balances), reforms need to be targeted to middle-income earners—specifically, workers with earnings between $30,000 and $100,000. This group is overly reliant on OAS, GIS and C/QPP as sources of retirement income, whether it is through lack of access to private or employer-sponsored savings, or simply because they have no “surplus” funds to contribute. It is in everyone’s interest to continue this dialogue and find a solution that improves pension coverage for all.