PRPPs: Too Late to Save Boomers

gold watchThere’s a growing constituency of people, influential people, advocating pension reform. But they’re not the people you might expect. They’re not pension experts. They are those near or in retirement who find their lofty expectations have been dashed by the absence of savings they expected to have, but never got around to making. Thus, CARP, a lobby group for older Canadians, is in the forefront, with two radio stations, a TV broadcaster and a magazine, Zoomer, at its command. It wants an enhanced Canada Pension Plan. It argues: “The CPP has successfully provided an affordable and reliable source of retirement security for the broadest reach of Canadians. However, the level of CPP benefits alone is inadequate and CARP has called for increasing CPP coverage and benefits.”

There’s only one glitch. An enhanced CPP will do little for for boomers nearing retirement – though it might instill a little fiscal discipline in their children. As would broad-based pension reform. So why the focus on CPP? Because the alternative, voluntary savings through RRSPs or the proposed Pooled Registered Pension Plan (PRPP), won’t do the trick either.

As the Canadian Centre for Policy Alternatives reports, in a paper written by independent pension expert Monica Townson: “what will be offered is not a ‘pension plan’ but a savings scheme.”

All quite true. But it raises questions in the retirement income debate that very few are deeply considering. The first question concerns the nature of retirement savings: should they be compulsory or voluntary. The second is whether they should come with a guarantee. These are both important questions – but they come too late for near-retiring boomers .

So how do we make it right for the next generation? Make voluntary savings compulsory? Or extend the compulsory savings system? In other words, more registered plans, or more CPP.

But first, we have to consider who has to be forced to save. It’s not the poor, nor even half the work force. Keith Ambachtsheer suggests exempting those making more than $30,000 from any new compulsory pension scheme,  in a paper he has jointly written with former Ontario Securities Commission chair Ed Waitzer.

The reasoning isn’t hard to follow. First, the median income of Canadian taxfilers is $25,000. Half the working population, more or less, receives an adequate income replacement, through a combination  of state pensions (OAS and GIS) plus forced savings (CPP).

As for the rich, that’s a somewhat subjective estimate, but the top income decile starts at $64,000. Those are the people who, if they don’t have registered pension plans, are socking away money in RRSPs and Tax-Free Savings Accounts, that is, if they’re not playing grasshopper.

Indeed, Townson highlights that point: “Very few take advantage of RRSPs and a recent survey from Ing Direct noted that only 41% of Canadians have a TFSA and almost half of those earn $100,000 a year or more. Only 24% of those surveyed said they used the TFSA for retirement savings.” The implication is that the rich can look after themselves.

But apparently, the middle either can’t or won’t. Hence Townson’s comment: “The proposed PRPPs simply offer yet another voluntary savings vehicle that will not guarantee any particular pension at all.”

The federal government’s Pooled Registered Pension Plans, legislation for which was approved in November, does indeed have flaws, most of them relating to the voluntary nature of participation. Ambachtsheer and Waitzer enumerate three:

— Voluntary employer PRPP participation, as envisioned in the bill, will result in minimal actual PRPP uptake.

— Bill C-25, in its current form, is virtually silent on the important questions of PRPP default option design, which most participants would either choose or default into.

— Saying PRPPs should be “low cost” and leaving PRPP regulation to current, cumbersome regulatory processes would not directly address potential conflicts of interest and informational asymmetry between enrolled workers and PRPP administrators.

They would prefer a structure that mandates employer participation, with perhaps a tax credit for offering the plan. They also suggest a mandatory contribution rate of 10% as the default option (even though that is lower than the 18% maximum for RPP or RRSP savings), preferably split between employer and employee. Finally, to escape the federal-provincial conflicts that bedevil such things as the establishment of a national securities regulator, they suggest a joint regulatory body to supervise PRPP administrators. But these decisions, all three, will  have to be made province-by-province.

Is that a good enough fix? Not suggests Townson. “Since very few people take advantage of existing voluntary retirement savings schemes, it is not clear why officials are claiming the proposed PRPPs will prove more attractive than the existing programs. So far, the only advantage being promoted for PRPPs is that management fees will be lower than for individual RRSPs, since contributions will be pooled. But, of course, there is no guarantee of lower fees, nor is there any certainty that this would be a big selling point for the plans. It’s also worth noting that there is no evidence people are not saving through RRSPs because of high management fees.”

The alternative is an expanded CPP, since it is both compulsory and provides a guaranteed income. But only if it is pre-funded, as Townson notes.

“CPP legislation now requires that any change/increase in benefits be fully funded in advance. A doubling of benefits would therefore mean that contribution rates would have to be increased to fund the benefits. The Canadian Labour Congress proposal suggests phasing in the required contribution increase over a period of seven years. But it would take 40 years for these increases to provide full funding for a doubling of benefits. However, benefits could be increased gradually during the phase-in period so contributors would be able to get gradual increases in their pensions.”

With pension reform, it’s six of one and half a dozen of the other. There is no quick fix. The only question is whether people save more by carrots or sticks – and we have yet to enter that debate.