Dear readers: Your humble scribe has been producing content on what is being called an imminent pension crisis, for 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 the stories with you. A category has been created, ‘Not so golden years,’ where this content will be archived.
“There are some other pension experts like me who are pressing the federal and provincial governments to expand the CPP/QPP, which would go a significant way to address this issue.” – Bernard Dussault, former chief actuary of the CPP
by John Devine
June 3, 2012 – A defined benefit (DB) pension plan is the most effective means of providing secure retirement income. That has been said before, and when the former chief actuary of the Canada Pension Plan (CPP) adds his voice to this assertion, he’s part of a chorus of expert opinion identifying the values of the traditional pension model.
However, this hasn’t stopped many corporations from abandoning their DB plans for more individual savings-type models, including defined contribution (DC), a trend Bernard Dussault finds sad but one that’s unlikely to be reversed.
The solution, he told the Alliance for Retirement Income Adequacy (ARIA), is both available and simple. A bigger CPP and Quebec Pension Plan (QPP) would fill the gap being created by the loss of so many DB plans, and would provide secure income to all working Canadians during their retirement years.
“The CPP and QPP are doing a very good job in terms of retirement security, and they could be expanded. About two-thirds of Canadian workers are not covered by an employer pension plan, they just have the CPP/QPP and the Old Age Security (OAS)/ Guaranteed Income Supplement (GIS). And because the CPP/QPP and the OAS/GIS provide only 25 per cent of average indexed-adjusted salary at retirement, that could be increased.”
Dussault proposes ultimately increasing the 25 per cent benefit rate to as much as 70 per cent, but initially to 50 per cent; the first bump would require increased employee and employer contributions each of three per cent, to the maximum yearly amount, on top of existing contributions.
“In 1996 the government tried to introduce what they called the Seniors Benefit, which was a very good idea because it would have moved a big part of the OAS toward the GIS, using the plan mainly for poverty purposes rather than just giving a gift to all Canadians who are 65 and over a grant based solely on a residency test.”
And his take on plans to increase the age eligibility for the OAS from age 65 to 67 may come as a surprise, he adds.
“Some people might be surprised by my reaction to that, but I’m talking on my own behalf. Because people are living longer, working longer and they start working at a later age, this is not a bad idea.
“But on top of that, I always thought that the OAS program should be revamped, because it’s a benefit that’s paid only to people who have (lived) in Canada for a certain number of years. It’s not based on a financial right or financial need.”
Dussault cites two reasons behind the private sector shift from traditional DB pension plans to DC: the expense of them and administrative complexity. But there are options to consider other than simply abandoning the plans, he offers.
“If the DB plan was too expensive, then rather than going to a DC plan, the sponsoring employer could consider reducing the scope of the DB plan.”
The other solution on hand, he reiterates, is an expansion of the CPP/QPP.
“There are some other pension experts like me who are pressing the federal and provincial governments to expand the CPP/QPP, which would go a significant way to addressing this issue.”
Ideally, companies would continue to offer their own retirement plans, which when coordinated with the CPP would give employees a clear idea of their probable retirement income.
DC plans, he says, could produce an uneven retirement landscape where one retiree, because of investment results, lives well, while another, because of poor returns or extended longevity, does not.
“With a DB plan, everybody is getting the promised retirement income … and nobody really loses provided the plan is solvent.”
An expanded CPP/QPP would also benefit all Canadian workers, particularly younger Canadians, by securing, during a longer contributory period, adequate income for their retirement.
Making DC plans mandatory for workers with access to them would improve participation levels, but wouldn’t necessarily lessen investment market risks, explains the former chief actuary, who adds he’s not a big fan of the government’s new Pooled Retirement Pension Plan (PRPP) model.
“I don’t see how PRPPs could improve the financial security of Canadian workers, because it’s not mandatory and it is a defined contribution plan having the same weaknesses as any DC plan.”
The single most important change the government could make to improve the retirement horizon would be to expand the CPP/QPP, contends Dussault.
“Any expansion of the CPP/QPP would be the best and most important thing to do. The GIS is already well designed – it does not provide an extraordinary amount of minimum income, but it does a very decent job by moving needy seniors out of misery, though not out of poverty. And, the OAS could be, as was attempted in 1996, better combined with the GIS to give more to the poor and stop giving it to people who don’t really need it.”
He’s also not big on hybrid plans, merging elements of DB and DC plans.
“It’s not entirely going to a DC plan, but whatever is converted to DC is not good. A DB plan is the best way of dealing with retirement security, which is meant to be achieved with a pension plan.”
While he doesn’t see the trend of moving away from DB in the private sector reversing, although there are signs it is slowing, Dussault says the same shift isn’t necessarily going to happen in the public sector.
“I am one of those pension experts lobbying the government to have a look at any issue they might have with pension plans, and if the main issue is one of cost, then they should review the scope of their plans rather than move into a DC plan.”
And, he adds, it’s worthwhile remembering the employers aren’t alone in carrying the costs of a plan, with employees contributing through payroll deduction.
When the members contribute, they then share the burden, he says.
How much income a person will need in retirement is an open question, but Dussault says 50 per cent of income at retirement should be enough for most people. An expanded CPP/QPP would gradually do that, and would cover one component of a retirement plan’s ‘three-legged stool’ that’s increasingly missing, a company pension, with the other two being the OAS/GIS and personal savings plans.
“The CPP/QPP are mandatory and they cover essentially all Canadian workers. They are DB plans with disability and survivor benefits. They are very well designed plans … as good as I’ve seen anywhere.”