Ottawa Citizen (Canada)
November 12, 2013
By Matthew Pearson
The head of the Ontario Teachers’ Pension Plan says it’s time to enhance the Canada Pension Plan and to force workers without workplace pensions to save for their retirement by joining new, mandatory plans.
Jim Leech says Canadians have failed miserably when it comes to voluntarily saving for retirement, so it’s time to reform the system or else future generations of taxpayers and workers will be saddled with skyrocketing pension bills they can ill afford.
His comments echo those of Premier Kathleen Wynne, whose government recently announced that it would create a “made in Ontario” retirement income plan if it can’t convince the federal government and the other provinces to enhance the CPP. [EXPAND Read more]
In a new book, The Third Rail: Confronting Our Pension Failures — co-written with Globe and Mail business reporter Jacquie McNish — Leech outlines a vexing demographic dilemma that pension designers never anticipated: The average retiree in Canada will soon spend more time collecting a pension than he or she did contributing to it.
Coupled with that phenomenon is the widespread failure to set aside the funds necessary to live comfortably in retirement, especially among the millions of Canadians without workplace pension plans.
“The concept of voluntary savings doesn’t work,” Leech said. “And it sounds kind of socialistic and big brother, but if you’re going to expect big brother to look after you if you haven’t saved, then we’re going to ask you to save.”
“It’s consume today or save and consume tomorrow.”
He points to a study former Bank of Canada governor David Dodge conducted for the C.D. Howe Institute that found a person would need to set aside between 10 and 21 per cent of their annual income for 35 years to have a retirement income equal to 70 per cent of what was previously earned.
But Canadians today are only saving at a rate of 5.5 per cent, which means many could be in for a harsh surprise the morning after their retirement party.
According to figures contained in Leech’s book, a person earning $50,000 a year today receives a maximum CPP pension of $12,150 annually if they retire at 65 after working 39 years. In addition, this worker is eligible for a $6,522 OAS supplement, meaning their annual income retirement would add up to $18,700, replacing only 37 per cent of their salary.
“That’s pretty scary,” he said.
Leech suggests three potential remedies, particularly among middle class workers who earn between $30,000 and $100,000 annually.
First, enhance CPP to take advantage of existing pension infrastructure. Enhancements would be financed through increased contributions so that employee earning $50,000 per year would see their annual increase jump to $2,930 from $2,300 (employers would match the contribution increase).
This would increase the CPP pension to $17,500, and, after adding in the OAS payments, would see almost half of the worker’s salary replaced.
An employee earning $100,000 would see CPP and OAS income jump to $37,000 per year.
He also recommends that defined benefit plans evolve so the risk is shared more equally between employer and employee and suggests the government create a series of large, pooled defined contribution plans that would be mandatory for people without workplace pension plans to join.
“We’ve proven through the Registered Retirement Savings Plan (RRSP) system that voluntary, even tax-incented savings doesn’t work. People are not saving to the extent they should or can in their RRSPs,” he said. “The people who use RRSPs are high-income people who are using it as a tax deferral as opposed to a savings vehicle.”
Although Leech and pension reform activist Bill Tufts seem to share a common goal — ensuring that every Canadian receives a sufficient income in retirement to afford an acceptable quality of life — they differ on how best to achieve it.
Tufts, who founded the non-profit group Fair Pensions for All, does not support enhancing CPP, claiming Wynne’s “hidden motive” is to hide the province’s public-sector pension plan’s $100-billion shortfall.
He also wants what he calls “gold-plated” public-sector defined benefit pension plans converted to defined contribution plans and supports the federal government’s new pooled retirement pension plans (PRPPs), which pool individual contributions in a larger fund.
“Canadians need to take responsibility for saving for themselves for their retirement, and the PRPP is a good solution to that,” Tufts said.
But PRPPs will have limited success because enrolment is voluntary, Leech said.
He wants people to be forced to save so future generations aren’t burdened by the high costs of caring for them in their old age because they didn’t save sufficiently.
At $36 billion this year, Old Age Security and Guaranteed Income Supplement payments are now the single largest line item in the federal budget, and it’s expected to triple in the next 16 years based on the government’s own projections, Leech said. [/EXPAND]