The Canadian retirement system is unproductive and inefficient, but how do we tame this administrative beast without toppling the entire system? Taming it requires simplicity, efficiency and uniformity, not new schemes that add complexity and cost to employing workers.
To encourage savings, Canada linked retirement savings to the Income Tax Act, making it a tax-favoured activity. But we overly complicated the process by tacking on excessive minimum pension standards and complex, barely decipherable tax rules. And we weakened retirement savings by making it voluntary, imposing arbitrary contribution limits and delegating administration to often inexperienced and apathetic employers, trustees and union affiliates.
In 1987, when I first practiced law on Bay Street, the Ontario Pension Benefits Act contained 39 sections. A year later, post-reform, it grew to 116 sections, thereby increasing the cost of pension administration—enough to discourage even the most passionate employer. It’s no wonder the number of private sector DB plans has dropped precipitously since the late 1980s.
There are now 11 pension regulatory jurisdictions in Canada (12 if you include the Canada Revenue Agency), each with its own legislation and bureaucracy, regulating pensions for tens of millions. By contrast, the United States has a single act, the Employee Retirement Income Security Act, regulating hundreds of millions. And our income tax pension regulations are so complex that administrators must hire costly consultants to guide them through the maze of rules and regulations.
We’ve recently been introduced to tax-free savings accounts (still underutilized), pooled registered pension plans (the jury’s out), Canada Pension Plan (CPP) expansion (rejected by the feds), a possible Ontario pension plan (will this be similar to the little-known Saskatchewan Pension Plan?), Quebec’s longevity pension (innovative thinking, but another unwelcome payroll tax) and New Brunswick’s shared-risk pension model (too much risk, too little sharing). These ideas may have merit, but they also serve to demonstrate how splintered our retirement system has become, with each jurisdiction adopting its own go-it-alone solution to the perceived problem.
Rather than encouraging retirement savings, our entire savings infrastructure has had the opposite effect. Canadians aren’t saving enough, and employers are abandoning pension plans in frustration.
Imagine a Canadian retirement system featuring simplicity, efficiency, uniformity and all of the following:
- a single (simplified) act regulating minimum pension standards for employers;
- a single minimum standards regulator;
- mandatory enrollment and employer participation;
- seamless integration of personal retirement savings with CPP administration and investment management;
- lifetime retirement savings limits for all citizens; and
- longevity and inflation protection.
I will expand on these ideas in future posts, but consider for a moment what might be achieved if we simplified retirement savings and took most of the money spent on regulation, consultants and court proceedings and spent it on—wait for it—retirement savings.