With our federal and provincial ministers soon to meet once again on pension reform, the publication of this book could not be more timely. Even better, it is not just another dull pensions book full of demographic projections, mortality tables, balance sheet funded ratios, and investment strategies. Instead, Ontario Teachers’ Pension Plan chief executive officer Jim Leech and senior Globe and Mail writer Jacquie McNish have written a compelling narrative on the growing gaps that have emerged in Canada’s retirement income system, and what we can and must do to close them. In short, they offer our political leaders and the rest of us a clear 21st-century pension vision for Canada and a roadmap to achieve it.
As it must, the book starts by creating context. Not only will an unprecedented 7 million workers leave the workforce in the next 20 years, they will also live longer than any previous generation. Some 60 per cent of these workers are not members of an employment-based pension plan. The likely result is that, while the combination of OAS, GIS, and the CPP provides a strong income floor for low-income retirees, many middle-income workers will suffer material declines in their living standards in their retirement. Leech and McNish also confront head-on the “rich-poor” gap between public sector and private sector workplace pensions. They make two important points. First, you don’t close the gap by tearing down good public sector pension plans. Second, many public sector plans do need to be redesigned to be sustainable.
Possibly clearer than any book on pensions thus far, The Third Rail takes care to connect the future of pensions to its past. To fix the future, we need to understand how we got to today. Equally important, the writers juxtapose the need for collectivity in good pension design on the one hand, with the imperative of individual leadership to make that collectivity work on the other. So we suffer with City Councillor John Ferguson as he fights the mismanagement of Saint John, N.B.’s pension plan. We hit the campaign trail with Rhode Island treasurer Gina Raimondo as she sets out to convince public sector workers that their pension plans as currently configured are bankrupting the state and its municipalities. We stand in the room with pension supervisor Dirk Witteveen as he confronts a hostile crowd of Dutch pension managers with the news that he is going to toughen up the pension rules to ensure that Dutch pension plans will make good on the promises they are making to their members. These dramatic scenes underscore the book’s title The Third Rail and its fundamental message: fixing Canada’s pension system will take a good deal of political courage.
Leech and McNish do not advocate a one-size-fits-all solution . But they do advocate collective pension designs that can benefit from good governance, economies of scale, and the sensible pooling of risks. To their credit, they also point to the challenge of making good collective pension designs work in the real world. It is a fundamental human temptation to favour the present at the expense of the future. So, for example, we did not save the pension surpluses that emerged in the late 1990s for a rainy day. Instead, we spent them on enriching pension benefits and taking contribution holidays. Are we now acknowledging the resulting pension deficits that have emerged over the course of the last decade? No, in many cases the true sizes of these deficits continue to be hidden by making unrealistically optimistic asset return assumptions. In short, the authors tell us, to be sustainable, retirement income systems must be designed and managed with intergenerational fairness foremost in mind.
This is a powerful message for Canada’s ministers and their officials to contemplate as they gather to discuss the current gaps in Canada’s retirement income system. It appears that increasing CPP benefits is back on the agenda, and that is indeed one possible solution to Canada’s emerging pension adequacy problem discussed in The Third Rail. The book should be required reading for our political leaders before they meet.
Keith Ambachtsheer is director of the International Centre for Pension Management at the Rotman School of Management at the University of Toronto.