Middle-income workers to get new attention as private sector plans disappear.
We probably need a reminder that the ongoing pension discussions, which are to pick up this month in a meeting between Federal Finance Minister Jim Flaherty and his provincial counterparts, are not about lifting the elderly poor out of their poverty. As a nation, we largely solved that problem in the last century.
These days the task is to bolster Canada’s ailing pension system and, though it’s not often stated in bold terms, to begin to search out ways of to ensuring that middle-income Canadians can enjoy a decent standard of living in their retirement years.
It is members of this middle income group, with incomes in the $30,000 to $100,000 range, who are today facing the prospect of a difficult retirement.
In a new book, The Third Rail, Jim Leech and Jacquie McNish show how problems emerging largely in a single sector of Canada’s “three-pillar” pension system have joined with a vastly extended life expectancy to change the income calculations of this seemingly well off group.
Jim Leech is the about to retire CEO who heads the huge and impressively successful Ontario Teachers’ Pension Plan; Jacquie McNish is an author and much-awarded senior writer with the Globe and Mail.
Pension programs which make up the first and second pillars are government creations and, in political terms, for now quiescent. The federally-funded, universal Old Age Security program and 1970s income-tested Guaranteed Income Supplement make up the main portion of this first pillar; their success in lifting all but a tiny three per cent of the low income elderly to above the poverty line has been noted worldwide. The second pillar is the Canada Pension Plan (and a parallel Quebec Pension Plan run by that province), which today pays retirees a base pension of up to 12,150 a year.
The third pillar consists of “voluntary” workplace pension plans, sponsored by private companies and governments for their own workers, as well as by unions.
The huge workplace pension funds built by the public sector and major companies, and paying defined benefits are an ongoing success. With their size and expertise, these funds are in a position to make richly rewarding investments that will keep them solvent for a long time to come.
However defined benefit pension funds in the private sector have been on a downward slide – in many cases, Leech and McNish tell us, because of the disappearance of the many manufacturing companies that sponsored them, but also because of funding errors, lax management, a readiness to succumb to political pressure, and much more.
Notable among their problems has been the effect of our society’s ever-growing longevity in extending the periods of pension payouts.
Defined benefit workplace plans in the private sector began to lose popularity in the 1970s where employee enrolment has slipped from 35 per cent of workers to just 12 per cent today, while enrolments in less helpful defined contribution plans began to rise. But the effect has been to leave the majority of workers without any privately arranged retirement protection, and the prospect of a bleaker lifestyle than anyone had once foreseen.
The provinces have been paying attention. British Columbia, Alberta, Ontario, and Nova Scotia, along with a procession of private bodies, have had studies looking specifically at the fallout from the decline in workplace pension offerings, and ways of bringing on a new era of pension support. The proposals coming out of these studies have been quite general, a major one being increased use of the government managed Canada Pension Plan.
A popular suggestion is to introduce a second layer CPP, similarly funded (through employer and employee and self-employed payments, confined to workers in the $30,000 to $100,000 income range, to bring total pension amounts up to 70 per cent of their earned income at retirement.
Another message emerges in The Third Rail, and more broadly in pension arrangements being introduced in OECD countries today. The old defined benefit plan, where pension plan members are assured a guaranteed payment amount, is not appropriate in this unpredictable world.
What is more rational is for employers and employees to agree on “target” benefits; if funds are in short supply, there will be adjustments. Cost-of-living bonuses could be dropped; employers and employees might have to (temporarily) pay higher premiums and pension payments might be cut for a time. An agreed-upon principle in this pension system lass it’s being developed in Europe is that employees as well as employers have to.
In tomorrow’s world, pensions would likely be stacked and mingled, with the goal of bringing total pensions to an income replacement level. And don’t be surprised if some of this stuff is mandatory. We’re hopeless now at saving on our own.