Canada’s pension system has a large problem that needs addressing—and the sooner, the better. Our pension system is often characterized as a stool supported by three legs: public pensions, in the form of the Canada Pension Plan (CPP) and old age security (OAS); workplace pensions [registered pension plans (RPPs)] featuring employer and some employee contributions; and personal retirement savings via RRSPs for individual contributions.
Two of the legs have problems. The RPP leg keeps getting shorter as pension coverage continues to fall. According to figures just released by Statistics Canada in December, pension coverage across all sectors was 38.4% in 2011 compared with 38.8% in 2010. RRSPs have long been the weakest leg, honeycombed (rotten) by accessibility for withdrawals prior to retirement and generally inadequate personal savings rates. The result is, individual Canadians are sitting on retirement stools that vary in stability from a precarious perch on a one-legged “shooting stick” of CPP and OAS to a potentially wobbly two- or three-legged model. Under the current regime, many future retirees will have to be financial acrobats to avoid hitting the cold hard ground of poverty.
From a long-term policy standpoint, provincial and federal governments are becoming increasingly concerned about the declining adequacy of retirement incomes. This has been the impetus for most examinations of the pension system and regulations carried out over the past six or seven years on mandates of various provinces and the federal government. It has been a central theme, at least annually, of provincial and federal finance ministers’ meetings since 2010. They are aware that governments and taxpayers will be facing increasingly tough challenges to fund minimum income supports and healthcare costs, as retirement incomes decline under the pension system status quo.
Provincial and federal governments working together have focused on two paths for pension reform. Implementation along the pooled registered pension plan (PRPP) path has already occurred federally and in Quebec. Unfortunately, the PRPP is doomed to fail, as the federal government has laid an inadequate foundation for this path in at least three ways.
First, it failed to exercise leadership and make workplace pensions mandatory for federally regulated employers. Although Quebec has taken this step in its version (called the voluntary retirement savings plan), we can expect that many other provinces will not, creating both regulatory and economic disharmony.
Second, the flaw of PRPPs lies in the pipe dream of federal politicians that these vehicles will be “low cost,” as they are unlikely to achieve the necessary economies of scale (although they might if workplace pensions were made mandatory). Furthermore, the gratuitous handing over of PRPPs to the financial services industry provides little incentive to make them low cost.
Finally—and perhaps the most fatal flaw—financial institutions mandated to deliver PRPPs have a trust deficit in the eyes of many Canadians.
The other path is CPP expansion. Common arguments in favour include the fact that Canadians have developed a very high level of trust in the administration and investment of the CPP, and the CPP has much lower administrative costs than what the financial services industry charges for most of its retirement savings products—certainly much lower than PRPPs are expected to cost. Increasing the base level of CPP benefits will help all workers and provide more financial stability for those who lack adequate workplace pensions or individual retirement savings.
In addition, CPP expansion offers a golden opportunity to address what may be the thorniest issue in systemic pension reform: raising the current retirement age of 65, which could significantly reduce the costs of increasing CPP benefit levels. CPP expansion will also significantly boost the economy over the medium to long term, as higher retirement benefits increase the purchasing power of recipients.
These last two arguments—together with a gradual, phased-in approach to CPP expansion—are sufficient to overcome the notion that the Canadian economy is too fragile to withstand the shock of increasing employer and employee contributions to fund increased CPP benefits.
In the absence of a national consensus on reforming the Canadian pension system, provinces will develop their own solutions. Some will be more effective than others, and, undoubtedly, this would result in even more economic balkaniza-tion of the Canadian federation. It was apparent from media reports of the last federal/provincial finance ministers’ meeting in December last year that a sufficient political consensus (two-thirds of the provinces representing two-thirds of the population) is close, if not already a reality. It’s time for the Government of Canada to move forward to this will of its people.
Greg Hurst is managing director of Greg Hurst & Associates Ltd.
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