Morneau Shepell suggests a new government-sponsored pension program at the provincial level as a way to improve the retirement system.

A paper entitled Filling the Pension Gap by Fred Vettese, the company’s chief actuary, says a government-sponsored pension program that uses net replacement ratios—a standardized percentage of disposable income depending on gross household earnings—will allow for comfortable retirement.

The goal of the suggested pension program is to provide net income replacement ratios that vary by income, broken down by the following:

  • gross household earnings of $25,000 should have a net replacement ratio of 100%;
  • gross household earnings of $40,000 should have a net replacement ratio of 90%;
  • gross household earnings of $60,000 should have a net replacement ratio of 80%; and
  • gross household earnings of $85,000 should have a net replacement ratio of 70%.

This assumes that members of lower-income households—which often do not have additional funds to contribute to RRSPs, for example—are supplemented in full. Meanwhile, members of higher-income households are likely contributing to such additional voluntary savings.

“Currently, the retirement income system seems to have lost a little ground,” says Vettese. “As of December 2012, only 21.1% of workers in the private sector are covered by a pension plan, which is the lowest level of participation since the mid-1960s. It’s time for a change.”

The proposed program focuses on middle-income earners, factoring in marital status, income level and number of children.

At both ends of the spectrum, most lower-income Canadians (with gross household earnings of less than $25,000) and higher-income Canadians (with gross household earnings of more than $100,000) benefit from mandatory savings and voluntary savings, respectively.

These groups combined make up 32% of all Canadian households, leaving middle-income Canadians to make up the majority at 68%—a group Vettese is narrowing in on for suggested pension reforms.

“By focusing on middle-income Canadian families,” adds Vettese, “a government-sponsored pension program will provide the majority of Canadian workers with a better net replacement ratio.”

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Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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