The pension divide in Canada is a yawning public sector-private sector gap.
In the private sector, 76 per cent of employees don’t have a pension of any kind. In the public sector, 86 per cent do and they usually have the best kind.
By best kind, I mean a defined benefit plan where you receive a monthly amount for life when you retire. You don’t have to worry about how to invest the money or what it’s invested in. You can sleep easily at night.
Only 10 per cent of those in the private sector have this kind of plan and many are now grandfathered. In their place, companies are offering defined contribution plans – if they offer anything at all – which match money contributed by employees. Retiring employees have to figure out how to turn that cash into a reliable stream of income, a source of stress and anxiety
The gap is a growing source of friction, with some critics enviously eyeing public sector pensions and saying they are unaffordable and unfair. Far too generous. Wind them up, they say.
But would that really be a good idea?
If you own a business in Cobourg or Orillia, or St. Catharines or Collingwood, or for that matter in Toronto, the answer is no. You may wish you had as good a deal as your neighbour the teacher, the firefighter or nurse, but don’t wish their pension away.
The money they are paid is a huge economic energizer in the community where they live. The money they spend on groceries and restaurants, at the hardware store or taking yoga and fitness classes is greasing the local wheels.
A study by The Boston Consulting Group (BCG) commissioned by four of Ontario’s biggest pension plans, took a look at the relationship between pension income and the health of communities.
The 2012 study found that on average 14 cents of every dollar of income in Ontario communities come from pensions. The biggest chunk of that pension cash comes from defined benefit plans. The rest is from RRSPs, Canada Pension Plan and other supports like Old Age Security (OAS). That cash keeps smaller communities afloat because the money the defined benefit pensioners spend is someone else’s income.
In Toronto, pensions contribute 11 cents of every dollar of income in the city, the study found. In Elliot Lake, it is 37 cents, in Cobourg 27 cents, in Orillia, 24 cents and St. Catharines, 23 cents.
The four pension plans funding the research were Ontario’s biggest –Healthcare of Ontario Pension Plan (HOOPP), Ontario Municipal Employees Retirement System (OMERS), OPSEU Pension Trust (OPTrust) and Ontario Teachers’ Pension Plan (OTPP).
They were looking for support for the argument that defined benefit pension plans offer a lot more than cash in a pensioner’s pocket. Rather, they help with social cohesion and reduce pressure on government programs.
Here are some of the findings:
- In 2012, Canadian defined benefit plans paid out $72 billion to 3.5 million pensioners.
- Most of this money is spent where they live.
- In Ontario, 7 per cent of all income in our towns and cities, or $27 billion, is derived from defined benefit pensions.
- That $27 billion generated $3 billion in federal and provincial income tax, $2 billion in sales taxes and $1 billion in property tax on an annual basis.
- Seniors with defined benefit plans are confident consumers because the predictable income stream allows them to better plan their affairs.
- Defined benefit plans offer a broader social benefit, because people who get them rely less on benefits like the Guaranteed Income Supplement (GIS) to the tune of $2 to $3 billion a year.
“These pensions are an important part of income in their communities,” says Jim Keohane, HOOPP’s CEO. “You get different spending patterns because you don’t have to worry about running out of money.”
The study offers a six-point plan to encourage better pension coverage for all Canadians, something everyone wants but everyone is struggling with how to do it.
So we need more of them, not less.
The study concludes with some suggestions including:
- Make workplace pensions mandatory to force savings. The coming Ontario Retirement Pension Plan is an example of how that might happen, as is Britain’s Nest (National Employment Savings Trust.)
- Don’t wait. Governments should do something now, whether enhancing the CPP or going another way.
- Share the risk between employees and employers, so that pensioners aren’t left managing their money alone.
The study won’t reduce public sector pension envy, but it does explain why these plans are important. We need more like them, not less. The trick is finding a way for that to happen.
Source: The Star