With its aging population and growing longevity, Canada needs to overhaul its public and private pension systems in order to secure the future of new retirees, according to a fresh report.

Published by the independent non-profit Public Policy Forum, the report is based on discussions during the National Summit on Pension Reform, held in February in Fredericton.

The document notes that while Canada is not experiencing a pension crisis, the current situation is not sustainable, with demographics being a major challenge.

Aging population
“For the first time, there will be more people retiring than entering the workforce,” the report predicts. “Fewer workers and more retirees will strain the system of public services, including healthcare, social services and, perhaps most acutely, retirement income security.”

The public and private programs that underpin retirement income security in the country, such as pensions, income supplements and personal savings, will come under serious strain, according to the document.

“Pension plans, like many social programs in Canada, were established when people did not live as long after retirement, when there were more workers paying into plans than retirees drawing from them, and when there was greater certainty of good returns,” the study notes. “Those ratios are rapidly shifting.”

Lifetimes in Canada, home to the world’s largest group of baby boomers, are increasing. In 1950, a 35-year-old Canadian had a remaining life expectancy of 38.6 years, but in 2010, this climbed to 46.8 years, according to the C.D. Howe Institute.

Inadequate pension access
Uneven and incomplete pension coverage is another issue plaguing the country. More than 60% of Canadian workers do not have access to a registered pension plan, according to 2010 data from the Office of the Superintendent of Financial Institutions.

There is also a big discrepancy between the public and private sectors. While 87% of public employees have pension coverage, only 24% of private sector workers do—even though private sector employees make up the bulk of Canada’s labour force.

Also, public servants still have mainly DB plans, but these plans have become more scarce in the private arena—52% in 2010 from 76% in 2000.

So how can Canada address these problems?

One of the recommendations made during the conference was that pension systems must adapt better to changing demographics and market conditions, with provisions such as contingent ancillary benefits being introduced into new models. New Brunswick’s shared risk pension model could serve as an example, the report says.

“However, it is not just pensions that need to adapt—other savings vehicles need to change in order to meet the needs of the current working generation,” the paper says. “Canadians need more options to make it easier and more rewarding to save.”

Private coverage
Another recommendation was to help employees who currently have no access to a company pension by either expanding the Canada Pension Plan or introducing new private sector measures such as pooled registered pension plans (PRPPs).

Several provinces have expressed willingness to adopt PRPPs, whose features include auto-enrollment (with an opt-out) and nudge tools that facilitate greater retirement savings.

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Ishmael Sharara:

The pension problem to me is more of a macro-economic problem. Ultimately the ability of individuals to save for retirement depends on whether they have secure employment and adequate incentives exist for them to want to save in the first place. In this regard, the expansionist monetary policies of the central banks have not been of much help with their resultant low interest rate environment and its corresponding negative impact on savings. So I think the problem has more to do with ability and willingness to save rather than options or vehicles to save.

Friday, August 09 at 3:04 pm | Reply

Robert in Vancouver:

Sorry but you are wrong regarding employment being the problem.

The fact is that 93% of people who want to work have a secure job (the unemployment rate is only 7%).

You are right that incentives to save are lacking.

But people didn’t save even when interest rates were over 10%, so interest rate or monetary policies aren’t keeping people from saving. That’s because there were no good savings vehicles such as TFSA’s.

A lot more working people (business owners are working people too) would save for their retirement if TFSA limits were eliminated.

Personal assets would be rolled into TFSAs, then when those people retire they could look after themselves with tax-free income from their TFSAs instead of relying on government to look after them.

Monday, August 12 at 12:45 pm

Robert in Vancouver:

Self-employed people, small business owners, and many others without gold-plated government pensions would be able to look after themselves in retirement if there was no limit on the amount we can put into a TFSA each year.

For people under 30 this doesn’t matter.

But for people over 50 this is a huge issue because with a $5,500 per year contribution limit, we don’t have enough time left to build up a dividend paying TFSA to a sustainable amount before we have to start drawing from it.

Friday, August 09 at 7:13 pm | Reply

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