The proposed system, to be launched in 2009, would allow individuals to invest US$1,000 into a private retirement account. Each year after that, an additional US$100 would be added to the allowed investment and yearly contribution limits would be raised over time, eventually permitting all workers to set aside four per cent of their payroll taxes into their accounts.
Critics of the plan say the President is making a political crisis out of a non-existent problem. Detractors say Social Security is completely solvent through the year 2042; even if nothing is done, it will still provide 80% of current benefits in 2075.
It seems people who are already retired and who would be exempt from the new plan have difficulty with it as well. In a statement after the State of the Union address, the Washington, D.C.-based American Association of Retired Persons’(AARP)chief executive officer William Novelli said, “private accounts that drain money out of Social Security will cut its guaranteed benefits, increase the debt and pass the bill on to future generations. AARP is working to strengthen Social Security, not dismantle it.”
But here at home, do Canadians have to worry the debate will make its way across the border? The short, and perhaps welcome answer, is no. For example, Serge Charbonneau, a partner in the Montreal office of Morneau Sobeco, says what’s being debated in the U.S. is not just based on mathematics. “Yes, it’s a big issue and there are some actuarial foundations behind it, but there is another dimension that is as important, if not more, and that is the political dimension.”
And John Moore, president of the Third Party Administrators’ Association of Canada in Markham, Ont., notes there are big differences between the two systems. “The Social Security system is ‘pay-as-you-go’ and as the liability increases, the government has to put more money out and contributions being made by workers are not sufficient for long-term sustainability.” But he says the investments made for the Canada Pension Plan by its investment board has ensured its current and future sustainability. Moore also stresses that because Canada appears to have a larger middle class than the U.S., its retirement needs are much different and the debate initiated by Bush will not likely make its way across the border.
JUST THE FACTS
A woman in Berlin went to extremes to collect old age benefits from the German government. After her father died, she hid his corpse in a garbage dumpster for three years and collected his pension benefits cheques. Police were suspicious after the woman failed to give credible evidence of her father’s whereabouts in January.
Although the police do not suspect foul play, they are investigating the circumstances. The woman was charged with fraud and breaking German burial law. Police said she may have to pay back the benefits believed to total tens of thousands of euros.
WORKING FOR A LIVING
Americans save more for retirement than residents of any other country, putting away an average of US$687 per month, according to a survey by Parisbased AXA Group. But at US$1,993 a month, Americans rank fourth in terms of how much money they need to cover their household expenses in retirement. Average monthly retirement incomes stand at US$2,198. According to the report, Canada has the highest average monthly expenses at US$2,062 and a monthly retirement income of US$2,528.
The German government has ruled out mandatory private savings for retirement. Back in 2001, the government created a plan called Riester Rente, which allows people to save money and receive contributions from the government.
But demand has been below expectations, with only 4.2 million people signing up for the program. This led the Social Democratic Party to suggest the government consider making the savings plan mandatory. But the government said private contributions will likely increase this year and there is no need.