Canadian governments need to focus on reforms that allow for increased retirement savings levels in order to ensure individuals have adequate replacement income at retirement. That was a key message delivered by a panel of speakers at the CPBI Western Regional Conference, held in Banff, Alberta from Oct.27 to Oct.29.
Current OECD standards for replacement income levels at retirement are 70% for people with an income of one-half the median income level, 60% for those at the median income level and 50% for those earning twice the median income level or higher. William B.P. Robson, president and CEO of the C.D. Howe Institute, noted that the real return bond is yielding 1.3%. While he said the bond yield has been as high as 1.6% recently, Robson isn’t optimistic that rate will increase substantially. “That might be about all the economy can achieve over the long run. It’s very hard to get that number above 2%,” he said.
According to Robson, factoring a 1.6% real return, an individual would have to save about 20% annually from the age of 30 to 65 in order to reach a 70% replacement rate at retirement. “Even to reach the 50% replacement rate, you’d still have to save more than what the income tax act allows right now,” said Robson.
Governments are considering several tax reforms that would facilitate increased savings opportunities for Canadians, according to Jack Mintz, palmer chair in public policy at the University of Calgary and the author of a report for the steering committee of the federal-provincial-territorial ministers of finance on the adequacy of Canadian retirement income. Some of these possible reforms include increasing the RRSP cash-in age limit, increasing earned income limits and increasing tax-free savings account contribution limits.
Mintz also outlined two areas where reform could assist small businesses and their employees in facilitating retirement savings—group RRSPs and multi-employer defined contribution (DC) plans.
Mintz said that group RRSPs with employer-matched contributions are very attractive savings vehicles; studies show that up to 90% of employees contribute to such plans, “because they don’t want to leave any money on the table.” However, he noted, payments to group RRSPs do not reduce payroll taxes, which limits their attractiveness.
“It’s very hard to understand why you would have a discriminatory approach to group RRSPs, which could be a very useful way for employers to provide a plan for their employees, especially in small businesses,” said Mintz.
He also said governments are examining the possibility of opening up multi-employer plans so that a bank or insurance company could act as a sponsor. “That regulatory change could do a lot to help small or medium-sized businesses,” he said.
According to Mintz, two areas of retirement income that have been much-discussed in recent years—enhanced Canada Pension Plan (CPP) and government-sponsored DC plans—aren’t likely to gain enough traction to offer additional help to Canadians in the future.
While Mintz says there has been some discussion at the federal level of potential enhancements to CPP, Minister of Finance Jim Flaherty has emphasized that any actions will be modest given the discord between provincial governments over preferred reforms. One change being looked at is an increase in the earnings replacement rate from the current 25%. This will be facilitated through payroll tax increases initially, followed by CPP benefit increases introduced at a later time in order to avoid intergenerational transfer issues.
While the idea of government-sponsored DC plans did get a lot of discussion in Canada in recent years, Mintz says there is a movement away from that idea. He says there are a number of reasons for this shift, the biggest of which is a concern over implicit guarantees on losses. “If you have a year like 2008, and you have a government-sponsored plan that loses a lot of money, you could see demonstrations down at the House of Commons or the Alberta Legislature,” he said.