Access to retirement saving room in Canada’s pension system is inequitably distributed between public and private sector workers, and reform is required to provide all Canadians the same opportunity for retirement, according to a C.D. Howe Institute report.
In A Pension in Every Pot: Better Pensions for More Canadians, author James Pierlot says Canada’s retirement saving system does well by the public sector, but generally fails the private sector.
“Private sector workers cannot join the kind of multi-employer pension arrangements that, in the public sector, deliver good pensions to large numbers of workers with low administrative costs,” says Pierlot.
While most public sector retirees enjoy generous indexed pensions, according to Pierlot, most private sector workers have no pension at all and their retirement incomes are usually a fraction of what public sector workers receive.
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The report states that private sector occupational or employer-sponsored pension plan participation by Canadian workers is at an all-time low of 23%, and the remaining 77% of workers with no pension coverage must rely on accumulations in RRSPs, home equity and non-sheltered savings to supplement public pension benefits.
Meanwhile, public sector workers enjoy a participation rate of 80% in defined benefit (DB) plans paying indexed pensions typically replacing 60% to 70% of pre-retirement earnings, and providing early retirement and bridging benefits to tide retirees over until public pension benefits commence.
Pierlot points to the example of a 55-year-old public sector worker who earns $60,000 a year, with a pension annuity valued at $21,649, along with RRSP contribution room of $3,353, for a total annual retirement savings room of just over $25,000.
“If you were in an RRSP making the same salary, you would be limited to $11,232, a difference of $13,770,” he says. “So the public sector worker has more than twice as much retirement savings room as a person with the same salary in an RRSP. By any measure, that is inequitable.”
Pension legislation reform is needed to allow participation by private sector workers in pension plans similar to public sector plans, explains Pierlot. “This will allow private sector workers to access the benefits of plan membership that public sector workers enjoy, such as risk pooling, economies of scale, and robust governance oversight.”
He also calls for amendments to the income tax and pension laws to de-link plan participation from employment so that workers don’t have to depend on their employers for pension saving. This would allow them to join pooled pension arrangements offered by trade associations, employer associations, and private sector service providers.
Tax limits on retirement saving make it difficult for private sector workers to save enough for retirement, explains Pierlot, so the government should adopt a target accumulation approach to retirement saving, with a target of $1 million or more.
“If a public sector worker can routinely get accumulations in the million-dollar range,” he says, “why shouldn’t the private sector worker have that too?”
According to Kevin Sorhaitz, a principal with Buck Consultants, Pierlot’s paper raises timely and relevant questions. “There is a problem, which is why there’s so much talk about pension reform and solutions,” he says. “From that perspective, I think the paper is right on the money.”
However, Sorhaitz is unsure of how Pierlot’s suggestions will actually benefit the people who need it most. “If the average Canadian is already not maximizing their RRSP contribution and not saving on their own, how is this system going to get them to save more?”
He says that unless it’s a mandatory-type system, there’s nothing to change their saving habits. “I don’t think the average individual understands or has the necessary cash on hand to be willing to invest early,” he explains.
While Sorhaitz says he would be happy to see all Canadians attain the same level of retirement savings and retirement income that the public sector currently enjoys, he wonders if the goal is realistic. “Is it really affordable across the board?” he asks. Sorhaitz points out that the trend of DB plans in Canada is working against Pierlot’s idea as employers look for ways to cut costs and increase efficiency in their pension plans.
Still, with several provincial expert commissions on pension plans due to release their findings soon and a call by Keith Ambachtsheer for a national supplementary pension plan, Sorhaitz says Pierlot’s paper comes at a good time.
Pierlot seems aware of this, and thinks it will work in his favour. “Change in this area will not happen until people begin pushing for it.”
To download the C.D. Howe report, click here
To comment on this story, email jody.white@rci.rogers.com.