With the dust settling on the “pension crisis,” has reform gone far enough?

Mintz recently chaired the Alberta Financial & Investment Policy Advisory Committee, reporting to the Alberta Minister of Finance, and was the research director for the Federal-Provincial-Territorial Ministers’ Working Group on Retirement Income Research.

In January 2008, Mintz was appointed the Palmer Chair in Public Policy at the School of Public Policy at the University of Calgary. He was a professor of business economics at the Rotman School of Management at the University of Toronto from 1989 to 2007. From 1999 to 2006, he was president and CEO of the C.D. Howe Institute, and from 1994 to 2001, he was the founding editor-in-chief of International Tax and Public Finance. He also chaired the federal government’s Technical Committee on Business Taxation in 1996 and 1997.

With the dust settling on the “pension crisis,” has reform gone far enough?

At the next federal-provincial-territorial meetings of the ministers of finance in the late fall, governments will look at two sets of reforms to Canada’s retirement income system. The first will be regulatory changes enabling the private sector to create new multi-employer plans. The other will be a “modest” change to the Canada Pension Plan (CPP) to provide more support for lower-income Canadians.

For some, these responses seem inadequate to the claimed “pension crisis” when financial markets crashed in 2008. At that time, Canadians became rightly concerned as to whether they will have enough income for retirement purposes. However, markets have gained back at least half of their losses, and federal regulatory changes reduced solvency pressures for defined benefit plans, taking some heat off the issue. And, a later research study conducted for the ministers of finance showed that most Canadians were doing a relatively good job in securing their retirement—a view that put a quick end to crisis fears.

With a more studied approach to the pension issues, governments have come to the right spot. Some changes are appropriate, as a minority of modest-income Canadians may not have an adequate retirement income.

How much money people need at retirement depends on a host of factors, but studies suggest that the standard—retirement income equal to 70% of working income—is overstated for most middle- and high-income Canadians. (For the latter, 50% may be sufficient to ensure an adequate level of retirement income.) Sure, some people with special health problems might need greater income. But generally, the 70% standard typically results in too much consumption at time of retirement compared with earlier years of raising a family and paying a mortgage.

The thrust of the reform helps to address the more immediate issues.

Many Canadians working for smaller and medium-size businesses rely on old age security and CPP when they retire, as well as their own retirement assets (RRSPs, housing equity and non-registered assets). Their companies might provide more efficient group RRSPs, which are flexible arrangements for employees frequently changing jobs, although, unlike other occupational pension plans, employer contributions do not reduce the tax base used for calculating payroll taxes.

An appropriate set of regulations would create more flexible arrangements for multi-employer occupational pension funds as well as creating an even playing field for group RRSPs. Multi-employer plans could be more easily developed if financial institutions and insurance companies sponsor pension plans instead of a union or employer.

An expanded CPP would provide secure benefit payments to many with modest incomes. However, the reform will be contentious. Not only will employers and employees pay greater payroll taxes, but also a simple increase in limits could result in a transfer from the young to the old since the latter will collect benefits without having to pay for them. The ministers are keen to require fully funded benefits, but this means tax payments will be made well before benefits are paid out in years to come.

So we will have to see how these reforms are carried out in the coming while. They are not dramatic, but our system was pretty good in the first place. BC

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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the September 2010 edition of BENEFITS CANADA magazine.