Sometimes the easiest questions to ask are the most difficult ones to answer.
Here’s the easy question to ask. Where do we begin the next stage of the debate about pension reform? The question is important because if we start in the wrong place, and ask the wrong questions, we will inevitably get the wrong answers.
As we debate the merits of reforming the Canada Pension Plan (CPP), the ins and outs of proposed funding and other changes to benefits standards legislation and, at the plan level, the questions of design, cost and sustainability, it’s more important than ever to be clear about our priorities and objectives.
We can easily be swept up in the pressures of the day—sudden moves in asset values can shake us up, and protracted periods of bad news can leave us thinking that we can no longer bear the status quo. Conversely, of course, the 1980s and 1990s were years of effervescent optimism, in which many previously unimaginable changes became realities.
But pensions are, first and foremost, long-term undertakings. And they are important—important to the individuals who will eventually draw on them for a greater or lesser standard of living in retirement, and important to us as a society that recognizes responsibilities toward the elderly and understands the importance of seniors’ economic contributions to communities.
And so, to avoid being swept up in the moment, we need to step back and ask ourselves a simple but foundational question: What is it that we want from our pension systems?
Surely our most important pension objective is decent pensions for Canadians. Our complex system is worth little if it fails to meet this threshold objective. What do we mean by decent pensions for Canadians? From the CPP, we have generally meant full workforce coverage and a retirement income at age 65 to replace about 25% of the year’s maximum pensionable earnings (YMPE). Are we meeting this target? Is this still our objective? The answers to these questions will define our values and objectives, and are the place to begin our debate about CPP reform.
From workforce pension plans, we have generally expected to replace 70% of employees’ pre-retirement income, as this is generally considered the level of income replacement necessary to sustain a person’s standard of living after retirement. Leaving aside an assortment of technical questions about this income replacement target, is our pension system going to deliver this quality of retirement income to working Canadians? Does this income replacement target remain our objective, and is it an important objective that is worth paying for?
These are not questions about which we can afford to be complacent. Michael Wolfson’s latest study, Not-So-Modest Options for Expanding the CPP/QPP, projects that, owing to a deterioration in our pension system, the cohort born between 1965 and 1970 will be much worse off in retirement than the cohort born between 1945 and 1950. While 30% of the earlier cohort is expected to suffer a drop of at least 25% in living standards upon retirement, a much larger 60% of the later cohort is expected to experience the same decline. In other words, twice as many retirees born between 1965 and 1970 will suffer a decline of at least 25% in living standards as compared to those born between 1945 and 1950.
Ultimately, defining what we want—as clearly as we can—is the best way to approach the pension system, and to reform it. Once we know what we want, we can determine its costs and its risks, and compare the risks and the costs to the value we attach to our objectives. If our pension objectives are important to us, then we should be willing to bear the necessary costs and risks. If we conclude that these objectives aren’t so important, then the costs and risks of the system will take reform in a very different direction.
But if we leave these crucial questions of values, objectives and priorities aside, we are really rudderless in our discussions of pension reform and are likely to be carried by this or that current of thought to a place we don’t really want to be.
Murray Gold is managing partner with Koskie Minsky LLP and was an expert advisor to the Ontario Expert Commission on Pensions (2008). The views expressed are those of the author and not necessarily those of Benefits Canada.
Related articles: