Canada’s pension plan reform conundrum
Pension plan reform in Canada is a bit like having chronic dermatitis. You never get rid of the issue, but it’s not going to kill you either. And every once in a while, it flares up into itchy, red bumps.
That’s sort of where we are ahead of an upcoming federal/provincial finance ministers meeting at Meech Lake in December: the itchy flare up stage.
The early onset of those symptoms was apparent at the Council of the Federation fall meeting in Toronto on Nov. 15, a gathering of provincial premiers that focused on long-proposed changes to the Canada Pension Plan.
The big news coming out of the one-day session is that the provinces agree there’s a problem with the status quo. The less encouraging bit is the ongoing disagreement on how to address it.
Some provinces advocate increasing CPP contributions so that the program pays out more when Canadians retire. Others, however, are worried that raising premiums will hurt job growth given that business will incur some of that higher cost.
Specifically, Newfoundland and Labrador and Prince Edward Island want CPP improvements (with P.E.I. proposing to hike maximum CPP contributions to $4,681.20 a year from $2,356.20 and boosting maximum annual benefits to $23,400 from $12,150.)
Nova Scotia, Alberta and the federal government, however, are convinced that a hike in premiums, which are split evenly between workers and employers, would be the same as increasing business taxes and could therefore kill jobs. Small business lobby group the Canadian Federation of Independent Business agrees. Heartily.
Just as it’s agreed there is a problem with the status quo, agreement on its root cause is irrefutable: Canadians do not save adequately for their own retirement.
Twelve million Canadians — two-thirds of the workforce — do not have occupational pension plans. The problem, especially for middle-income Canadians who may not be eligible for sufficient old age benefits in retirement, is that they don’t have sufficient personal savings to live increasingly longer lives.
Research done by the Institute for Research on Public Policy shows that approximately one-half of Canadians who were born between 1945 and 1970 and have career-average earnings of between $35,000 and $80,000 are likely to experience a drop in income of at least 25 per cent once they reach retirement.
In June 2010, provincial finance ministers agreed that despite such vehicles as RRSPs and tax-free savings accounts that provide an incentive to save, Canadians were still not doing enough to plan for their own retirement.
The federal government, in turn, introduced Pooled Registered Pension Plans (PRPPs) as a solution to the savings gap and provincial ministers agreed to consider a “modest” CPP enhancement.
Since then — despite the distinct political upside of pleasing middle class voters — there’s been no action to support the (albeit lukewarm) intent. Heading into the December meeting, it’s now been three years since the finance ministers agreed that Canadians need help to save for their own retirement in the form of a CPP enhancement.
In that time, of course, household debt has continued to soar.
Although there has since been some evidence that debt accumulation has started to level off, in the second quarter of this year household debt hit a record high of 163.4 per cent or $1.63 of debt for every $1 of earned disposable income.
Both the Bank of Canada and the Finance Minister have unsuccessfully warned Canadians for some time about the urgent need to better manage that personal debt — especially given the fragility of the domestic economy and its outlook.
Annual economic growth in Canada is currently at about 1.8 per cent and nominal growth, which is closely tied to government revenues, also remains weak.
That reality — combined with such high debt levels — raises the question of whether tweaking the CPP or taking even bolder steps will ultimately have much impact. And, of course, the potential cost to business and to successive generations of working Canadians must be taken into account.
Yes, the ultimate social costs of failing to save for old age are high, but it’s also not the primary responsibility of any level of government — nor of employers — to make sure that Canadians step up.
There is no shortage of programs and incentives designed to encourage individual retirement savings. A great deal of time and money is spent every year to educate financial consumers about the wide range of products and services on offer.
At some point, however, individuals have to make financial choices and take charge of their own future — whatever happens with CPP reform. Politicians, though, are reluctant to tell people they need to eat their brussels sprouts.
And while that bad skin rash may not kill you, over time the itching can be awfully uncomfortable.
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