After nearly five years of expert panels, white papers and public consultations there is a sense that the current wave of pension reform is winding down. And, most of us would say we don’t have much to show for all that effort.
An expanded Canada Pension Plan (CPP) was rejected and the changes brought about to pension legislation are inconsequential or simply hasten the decline of defined benefit pension plans in the private sector. The proposed pooled registered pension plans are intriguing but their ultimate effectiveness is unknown.
If pension reform has failed, it may be because we were asking the wrong questions. We zeroed in on low pension coverage within pillar three—occupational retirement plans and RRSPs. Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) comprise pillar one, while the CPP/Quebec Pension Plan is pillar two.
Indeed, the situation at first glance does look bleak. Only an estimated one third of private sector workers are covered by an occupational pension plan or group RRSP. As for the other two thirds, many of them are contributing only minimal amounts, if anything, to RRSPs. The impression then is that most Canadians, at least in the private sector, will either be spending retirement in relative poverty or will ultimately require a bailout at public expense.
The reality is somewhat different. Many of those not contributing to RRSPs are simply being sensible: young people are better off paying down their mortgages and if low-income Canadians are able to save at all, it should be in TFSAs rather than RRSPs in order to preserve their GIS entitlement.
The December 2009 Mintz report to the federal and provincial ministers of finance showed that seniors already have adequate retirement security. Thanks to pillar one, low-income seniors enjoy more income in retirement than when they were working. The poverty rate among all seniors (4.4%) is not just one of the lowest among OECD countries, it is significantly lower than that of working age Canadians. Canadians will not lack for basic food, shelter and health benefits in retirement, even without any third pillar sources of income.
So what is the problem? For starters, we need to decide how much responsibility low-income Canadians should take for their own retirement. Right now, they bear little or none. For some proponents of an expanded CPP—or a mandatory supplementary defined contribution plan—a hidden agenda was to wean low-income retirees off GIS. The question of whether this is appropriate or not should have, at least, been debated openly.
Low pillar three coverage also implies that many middle-income Canadians will need to reduce consumption in retirement. This is perhaps the crux of our so-called retirement crisis but I would submit that it is more of an education crisis.
Middle-income Canadians need to understand the consequences of not saving for retirement. Those consequences include a lower (but still adequate) standard of living, delayed retirement and/or dipping heavily into other assets such as home equity. Some will find this an acceptable trade-off for a better standard of living today, which leads to a question of basic rights. Assuming Canadians understand the consequences, should they be free to decide whether to consume now versus later? Some special interest groups would take that freedom away.
Finally, there is the question of what retirement means. Right now, it means being able to leave the workforce by age 65—whether able-bodied or not—and live off of income that is at least partly derived from public sources. Age 65, however, is arbitrary and ultimately may be unsustainable as a normal retirement age.
It ignores demographic changes and society’s needs regarding our labour force. As an alternative, the normal retirement age could be raised or lowered from time to time so as to maintain the desired ratio of workers to retirees. The ratio of workers to retirees was five to one in the 1980s but is projected to drop to two to one in twenty years’ time. What is the most desirable ratio? And should our tax rules encourage behaviour that promotes the health of our economy?
Another approach is to adjust normal retirement age as needed so that the ratio of working years to retirement years remains within acceptable bounds. In 1966, that ratio was about three to one (40 years of working to 14 years of collecting pension, at least for males). Today it is about two to one. In the public sector, the ratio is closing in on one to one. How can we better regulate this ratio?
There is a growing sense that ordinary Canadians collectively know more about what is good for them than the experts who have been dominating the pension reform process.
If the young and the low-income cohorts shun RRSPs it is because their money is better deployed elsewhere. If the middle-income are not saving every last dollar for retirement it is because they know there has to be a balance between pre- and post-retirement consumption. If more of us are working past normal retirement age, it is because we realize that age 65 is artificial and that we still have something to offer to society.
In summary, a number of questions should have received more attention during the last five years. The answers could not only have helped to guide us to a more sustainable retirement system, they would also tell us whether we truly have a retirement crisis on our hands.