Pension crisis…what crisis?

Enough with reinventing the wheel: if there are some minor cracks in the system, by all means fill them.

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Creative Commons/Chriscom

Creative Commons/Chriscom

Pensions seem to be a political football that no Canadian politician can resist kicking around. The latest “solution” coming out of Ottawa, floated Thursday, is a new hybrid “target-benefit” pension scheme that would be a sort of middle ground between traditional defined-benefit pensions and the more market-oriented defined-contribution plans favored by modern employers.

I was once briefly enrolled in something like this in the late 1990s when working at the Financial Post. At the time, management was encouraging staff to switch from the DB pension to something called TRIPP, which was basically a defined-contribution plan that “targeted” a certain retirement benefit in the future, but of course this “target” was not a guaranteed promise. In my case, at least, it was ultimately rolled back into my personal RRSP, and it was not a staggeringly large sum. After a few more corporate reorganizations, most of us ended up back in a more traditional DB pension, or opted out to maximize our RRSP room. What a concept: letting workers choose between taking market risk or being sheltered from it!

This latest federal proposal appears to be a similar hybrid creation, one that emphasizes the need to share investment risk between employers and employees. Under the pure DB model, employers bear the investment risk while under a pure DC model, workers bear the risk, just as RRSP investors do: when markets are up, things are great; if not, then not so much. But this proposed hybrid rapidly gets complex, with the same issues of pension surpluses or deficits that have plagued traditional DB pensions. It would have two classes of benefits. If the pension fund were in deficit, so-called “base benefits” could be lowered, but only “as a last resort.” In addition, there would be “ancillary benefits” that would be what I’d term “less guaranteed”: if markets were down and the plan seemed to be headed to a deficit, these would be the first benefits to be cut; on the flip side, if markets were going gangbusters and the plan enjoying a fat surplus, there would be the possibility of higher benefits.

In short, those now in DC pensions should view this as attractive, especially if the plan gives retirees some pooling of longevity risk: something that doesn’t happen with either RRSPs or traditional DC pensions. However, those who have long been in the safe harbour of DB pensions would probably see this as a comedown with the diminished assurance of guaranteed payouts in retirement. In any case, this proposal applies only for Crown corporations and federally regulated firms in the banking or transportation sectors. You can find the 37-page consultation paper from the Department of Finance website here.

Fraser Institute: CPP expansion and Ontario Pension Program rely on “misguided analysis”

The same day this story grabbed most of the media’s attention, the Fraser Institute released a study that questions whether there’s any kind of pension crisis at all. The paper, entitled The Reality of Retirement Income in Canada, was summarized  in Thursday’s Financial Post by the report’s author, Philip Cross, running under the headline “No pension crisis.”

Cross, formerly of Statistics Canada, said Canadians are already “well protected in their retirement” and that therefore “blanket increases in pension coverage are needless.” I tend to agree, as I wrote in a recent issue of MoneySense when addressing proposals for an expanded CPP. The impulse for a “Big CPP” is, Cross wrote, “based on the fundamental assumption that the public is too ignorant or misguided to plan for retirement themselves and that the meddling hand of government bureaucrats can help guide them.”

Let’s face it: we already have RRSPs, TFSAs, Registered Pension Plans offered by employers, CPP, OAS, GIS and finally that other federal proposal that’s well under way: the PRPP or Pooled Registered Pension Plan.  If that’s not enough there’s always the so-called “fourth pillar” of non-registered investments and real estate, not to mention a “fifth pillar” of support by family, friends and inheritances. If after all that, there are still a few pockets of poverty among seniors—Cross suggests there is among single or widowed elderly women who have never worked—these might better be addressed by better targeting of existing government benefits, Cross says.

As The Economist argues in its current cover story, “A Billion Shades of Grey,” people are living longer and healthier and many intend to stay in the workforce longer, particularly the well-educated well-paid “knowledge workers” like yours truly and presumably many readers of this website.  This trend is well under way in Canada too: Cross points out a quarter of Canadians aged 65 to 69 are still in the workforce, double what it was a few years ago. He makes a point I’ve made in the past, and which is similar to one of 42 “Tips” in the upcoming June 2014 issue of MoneySense: “Every extra year of working produces a double benefit of generating more income and reducing the years saving(s) are withdrawn for retirement.”

The fact is a cornucopia of tools already exist; publications like MoneySense are dedicated to the notion of showing readers how best to take advantage of them. Enough with reinventing the wheel: if there are some minor cracks in the system, by all means fill them. What Canadians need to do is get behind the wheel of existing programs and start driving seriously to the destination called retirement. I’d prefer to call it “financial independence” but we’ll save that topic for another time.

 

 

 

 

10 comments on “Pension crisis…what crisis?

  1. Excellent article! I couldn’t agree more.

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  2. This article is spot-on! We have many vehicles for creating decent retirement income … but people do have to actually learn how to make use of them and have the will to do so.

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    • Jonathan, I strongly agree with your article, and would encourage our politicians to face the real –and ubiquitous, problem: that most Canadians ignore the need for retirement planning in their youth, and lack the knowledge and the confidence to use the available vehicles once they are older. Thanks, Moneysense, for seeking to redress this problem!

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  3. Bang on. Too much hand holding and savings vehicles from the government, not enough focus on retirement planning.

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  4. Having retired about 2 and 1/2 years ago at 56, I wonder why anyone would want to work past the age of 60 let alone age 65. There are plenty of young people just coming out of universities and colleges that actually NEED a job, who can not collect a pension unlike the people who are over 60 years old. There is actually a life after work that can be alot more fun than going to the office every day. Another benefit of retiring from the work force is that you will be creating an opening for someone else who needs the job.
    As for a pension crisis you are absolutely correct, there is no crisis, there are plenty of plans the government has created for retirees and there is no need for another, just get the people to particpate in the existing plans (RRSP, TFSA).

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  5. Question: The belief is that taking CPP at 60 is smart since the benefits received from this age to 65 would take to age 72+ if you started CPP at age 65. Is this still relevant given the age people are living to, and with the federal changes being made to CPP benefits, e.g., .06% penalty for every month prior to age 65? Ps, I would be exempt from the new rules but I still have nearly 10 years to go!

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    • One argument for taking it closer to 60 is that a bird in the hand is worth 2 in the bush and that you can always invest the proceeds. The one for 70 is that benefits are twice as much as at 60 and inflation indexed to boot. Maybe best to saw it off in the middle, or the traditional retirement age of 65!

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  6. Not all pure DB plans put employers on the hook. 1 on 20 Ontarians are members of OMERS, the $64B municipal employee plan. Employee contributions are currently jacked up to cover the current unfunded liability of over $8B, thus making up for financial crisis under-performance, previous contribution holidays, etc.. True, young and new workers are getting hosed since only 75% of today’s contributions are funding their retirements and 25% is making up the gap – but it is not municipalities/employers on the hook. Today a healthy 14.6% of employee earnings over $52k go into the plan and this will continue until the liability is wiped out – these are significant contributions.

    Most people are lazier than couch potatoes when it comes to their finances and are more like papasan pickles – so even after boosting financial literacy they need simple alternatives for investing:

    http://www.investing101.ca/2014/04/papasan-pickle-portfolios-low-fee.html

    But unfortunately, even with simple alternatives, humans discount future risks in many areas (health, finances, building in Calgary’s Bow River flood plain…) and may be destined to make bad decisions not their their future self interest. Canadians are bombarded daily with “Your Richer Than You Think” and “It’s Worth a Talk” bait to make them pay attention and use some of the existing savings vehicles. While the cornucopia of resources is there, it’s not working.

    So maybe the only alternative (and only need) is mandatory programs targeting the real gaps.

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  7. I have been forced out of the workforce at age 50. Drawing down my rrsp’s nowadays as I have no earned income.
    Will take cpp as soon as I can and will qualify for OAS at 67 possibly GIS if I spend all my rrsp for living costs to age 67. No pension from any company plans. Rrsps are heavily invested in equities for maximum growth over the next 17 years

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  8. Well we thought we were doing everything right, going to a planner, taking advantage of matching programs, setting our own nest egg up. We all know what happened in the automotive industry, so there went my production planning position, and my spouse who worked in the food canning industry closed down five years ago (who knew people wouldn’t have to eat food from their own country?).
    Now our plans to retire are dashed. Even by cutting back on everything and having been frugal all our lives we have a crisis. I work at a position that does not pay close to what I was accredited for and my spouse has 4 fours a week at a big chain store. Taking early pension at 60 wasn’t an option anymore it was a have to for income. You may not have a crisis but it is not the same for everyone even those who did use different vehicles and planned for the future.

    Reply

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