Labour Day pension blues

In some ways, it's appropriate that the Labour Day holiday marks the last long weekend of summer. Let's face it, while some of us are lucky enough to have jobs that we find fulfilling, a bit of time off to spend with friends and family is always welcome. We work to live, not vice versa.

That's why Canadians have come to expect that, when their working days are over, they can look forward to retirement-- a time to relax and enjoy the leisure they've earned through years of labour.

Unfortunately, these expectations are beginning to seem unrealistic for many. Canada's pension and retirement income system is in a shambles, and with a growing number of baby boomers reaching retirement age, the stage is set for a crisis of poverty among senior citizens.

The figures speak for themselves. According to investment industry analysts, Canadians are currently on track to replace only 50 per cent of their pre-retirement income once they retire. The situation in Alberta is even worse, with retirement savings that will provide only about 45 per cent of pre-retirement income.

Since pension experts agree that to retire without a drop in living standards requires about 70 per cent of pre-retirement earnings, it's clear that Canadians, and Albertans in particular, are going to face serious problems when they reach the end of their working lives.

Why this shortfall? Canada's retirement income system rests on what have become known as the Three Pillars: public pensions (the Canada Pension Plan and Old Age Security), workplace pensions offered by employers, and individual savings.

Unfortunately, the second pillar--workplace pensions --has been in decline for the last two decades. During this period a growing number of companies have decided that they no longer want to bear the cost of providing a retirement income for their employees.

According to government figures, in 2008 only 40 per cent of Canadian workers belonged to an employer-sponsored pension plan, and in Alberta the figure is just 33 per cent. This decrease in pension coverage is bad news, because a good workplace pension is an efficient and cost-effective way of saving for retirement.

The alternative to an employment-based pension is, of course, individual savings through a tax-exempt Registered Retirement Savings Plan. Unfortunately, the evidence suggests that RRSPs just aren't getting the job done for most Canadians.

There are several reasons for this. Faced with the stagnating real income and the reality of financial ups and downs, few working people are able to make regular contributions at a high enough level to generate the savings needed to support retirement.

Even for those able to keep up their contributions, it's hard to invest these savings in a way that generates a reasonable rate of return, especially when stock markets are as volatile as in recent years. Furthermore, most RRSP funds are invested in mutual funds, and the mutual fund industry in Canada charges some of the highest administration fees in the industrialized world. These fees eat away at investment returns, even when economic times are good.

For these and other reasons, RRSPs just aren't fulfilling their mission. The proof is in the pudding: a Statistics Canada study published last year shows that, for families whose main income earner is in the crucial 54-to-65 age group (in other words, people on the verge of retirement), only 65 per cent have RRSP savings, and the median value of these RRSPs is just $55,000. That level of savings isn't going to provide a dignified retirement for anyone.

Government leaders and pension advocates have admitted these problems and various remedies have been proposed. The governments of Alberta and B. C. have begun to explore a supplemental pension plan (to supplement the existing Canada Pension Plan and Old Age Security) tentatively called the ABC (Alberta-B. C.) pension plan. While this proposal represents an honest attempt to address the looming crisis in retirement incomes, the design of the proposed ABC Pension is fundamentally flawed, and will not be able to do solve the current problem.

Put simply: the ABC Pension suffers from some of the same problems that have hampered individual RRSPs. Participation will not be mandatory, even though this is the only way to guarantee that most workers will actually get a pension. The plan's proposed design also exposes individual participants to the risk of falling financial markets and low interest rates (lower interest rates make a pension more expensive). Finally, the suggested contribution rates (essentially, the rate at which participants save for retirement) are much too low to provide sufficient pension income.

The good news is that there is a better way. There is already a pension plan in Canada that provides almost universal coverage and a guaranteed benefit level --the Canada Pension Plan. The CPP is an extremely efficient plan, with very low investment and administration costs. The problem is that the level of benefit is far too low to provide for a comfortable retirement. So, instead of inventing a new, inferior supplemental plan, all that really needs to be done is significantly expand the CPP.

Of course, raising the level of CPP benefits will cost money but, unlike the costs associated with the ABC Pension plan, this will be money well spent. Since the CPP already has the tools needed to collect contributions and pay out benefits, the increase in costs will go almost entirely to higher benefits, rather than to administration. Unlike an Alberta-B. C. plan, the CPP is also portable from coast, to coast to coast. The CPP alone is capable of providing seamless coverage to working people all across Canada, and doing so at a reasonable cost.

This Labour Day, Canadians should throw their support behind the growing movement for fundamental pension reform based on expansion of the CPP. With reform, the dream of retiring with dignity can be realized by all Canadians, instead of only a privileged few.

Calgary Herald, Page A11, Mon Sept 7 2009
Byline: Gil McGowan

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