• Dear readers: Your humble scribe has been producing content on what is being called an imminent pension crisis, for the the Alliance for Retirement Income Adequacy (ARIA), a site designed to foster an informed discussion about retirement issues. It has been quite an education, and I thought I’d share some of the stories with you. A category has been created, ‘Not so golden years,’ where this content will be archived.
“We also argue to governments that (doing nothing) is tantamount to a subsidy because the employers who help their employees save for retirement are then at a competitive disadvantage to those who don’t, as their employees will rely on the tax system to pay for their retirement income.” – Ken Georgetti of the CLC
By John Devine
(Aug. 3, 2013) Employers wary of the promised benefit of a traditional pension have an existing solution to providing employees adequate retirement income, says Ken Georgetti, president of the Canadian Labour Congress (CLC).
The Canada Pension Plan (CPP) is a national defined benefit system that is universal, portable and, for employers, operates much like a defined contribution plan in that contributions are fixed and the promised returns, as well as fund investment and management, are handled by the national program itself, he says.
“That’s the beauty of our argument. We say the CPP for employers is a defined contribution (DC) plan. They make a contribution and walk away.”
The CLC is leading a push to expand the CPP as a means of dealing with what many are calling a looming pension crisis, as the estimated 60-65 per cent of Canadians with no occupational pension plan will be compelled to rely on government income supports and personal savings. The loss of workplace pension plans, particularly in the private sector, has collapsed the traditional three-legged stool of retirement – employer sponsored plans, government programs and individual savings accounts – and retirement experts say the remaining two legs won’t be enough to provide adequate retirement income.
In its Retirement Security for Everyone option, the CLC calls for a doubling of CPP/QPP benefits, as well as an immediate increase to the Guaranteed Income Supplement (GIS) and the Old Age Security (OAS) programs. It also seeks a national pension insurance fund, similar to the U.S. Pension Benefit Guarantee Corporation, which protects the retirement income of 44 million Americans.
A number of retirement/pension experts and labour leaders, including former CPP chief actuary Bernard Dussault and Paul Moist, national president of the Canadian Union of Public Employees (CUPE), back the CLC’s position on expanding the national program.
Business groups, however, oppose an expansion of the CPP – a stance Georgetti says is shortsighted as doing nothing now will come at a significant cost later.
“If they do nothing, the GIS costs in 25 years will go up to $32 billion a year. We also argue to governments that (doing nothing) is tantamount to a subsidy because the employers who help their employees save for retirement are then at a competitive disadvantage to those who don’t, as their employees will rely on the tax system to pay for their retirement income.”
The CLC and other advocates of an expanded CPP thought they had a deal in 2010, but the consensus evaporated and the federal government subsequently rolled out its preferred option, the Pooled Registered Retirement Plan (PRPP), a DC program that doesn’t require employers to match employee contributions and permits workers to opt out.
Monica Townson, an economic consultant on social policy, and current research associate with the Canadian Centre for Public Alternatives (CCPA), told ARIA in a recent interview the PRPP is little more than a “glorified personal savings system.”
When Canada’s finance ministers last met they, says Georgetti, assigned PEI finance minister Wes Sheridan the task of coming up with a formula for CPP expansion, and a trigger for its implementation. Opponents of an enhanced CPP maintain now is not the time, and the trigger would determine the time and conditions for an expansion.
Georgetti says fears that an enhanced CPP will imperil economic performance are overstated. The last time the program was changed, with higher contributions but no change to benefits, was in the mid-90s under then finance minister Paul Martin. No discernable negative impact on the economy was felt, he says.
“We did … a comparison to when Martin made changes to CPP to save it – what the economy looked like then and now. And in almost everything but one trigger, the economy is better now than what it was then. When they made those changes, there was no effect – in fact unemployment went down not up.”
Current thinking on CPP expansion seems to be a modest increase in the replacement rate from 25 per cent to 35 per cent, says Georgetti, who adds there also appears to be discussion on hiking Yearly Maximum Pensionable Earnings (YMPE), currently sitting around $50,000.
“We don’t know to what extend, but if you listen to experts like Bernard Dussault, he thinks it should go up to about $140,000.”
For an enhanced CPP to work, it needs to be fully funded on a go forward basis, says Georgetti. It could take more than 40 years to fully fund an expansion of benefits, although some experts, including Michael Wolfson, advocate for a speedier process spread over 20 years. Even if it is expanded over the longer term, it wouldn’t take long for Canadians to realize better CPP benefits, says Georgetti.
A recent brief from the C.D. Howe Institute suggested that increased longevity should lead to a national discussion of the “real retirement age,” which the report’s author, Marcel Boyer, told ARIA should be about 71 or 72. Georgetti says a later retirement age might work for some workers, but forcing “a hard rock miner to work to 71 would be impossible.”
However, he says a discussion needs to happen on the entire range of pension/retirement issues.
“This is like a tsunami that’s coming and no one is blowing the whistle. We need to have a discussion in Canada, which we aren’t having, about what is adequate retirement security.”