It’s RRSP time, again!
Check the Web. Scour the newspapers. Hustle to your friendly (?) financial institution and plunk down your cash. That is, if you have any.
Only 25 per cent of Canadians have RRSPs. The reason more do not is simple: They don’t have the money. Or, they don’t think ahead, being young or insouciant, or both.
RRSPs are an add-on, albeit an important one, to retirement income planning. So are Tax-Free Savings Accounts. So are other forms of personal savings. So, critically, are pension plans.
These, however, are under stress almost everywhere. What to do about pensions is therefore among the thorniest problems today – for governments and the private sector.
For decades, the gold standard for pensions was the Defined Benefit (DB) plan. Pay in and get an assured, fixed pension, indexed to inflation.
Today, just 9 per cent of people in the private sector have DB plans. Employers have been scrapping them as fast as possible, forcing employees into Defined Contribution (DC) plans in which they shoulder more of the investment risk. And, of course, there are many people whose companies have no plans, or people who are self-employed and don’t earn enough for an RRSP.
DBs survive in the public sector. But even there, many are struggling to be financially sound, although their continuation is defended vigorously by public-sector unions.
Even the mighty Ontario Teachers’ Pension Plan is changing its ways. It has no choice. Automatic cost-of-living adjustments are out. More risk will be allowed in investments. Even with top-of-the-class investment results, the fund can’t keep up with demand.
Teachers are overwhelmingly women. They are living longer than ever. An increasing number of them receive pensions for longer than they worked. This obviously cannot continue without change: later retirements, more contributions, smaller pensions or some combination of changes.
Universities have massive pension liabilities, courtesy of low investment returns, too-small contributions and commitments that cannot be afforded. Bringing them to proper funding levels will require higher contributions from employees or some miraculous recovery in market returns, or both. The status quo, coupled with the requirement to put them on a sounder footing, will mean millions taken from operating budgets, the largest element of which are employees’ salaries and benefits.
Some public institutions – the New Brunswick government in the lead – have moved to shared-risk pensions, which lessen guarantees, raise contribution rates and retirement age for younger employees, and link anything above basic pensions to market performance.
What’s happened to pensions is the perfect storm of unforeseen events. Everyone knew the population was going to age, but not as fast as it has. Mortality rates have been improving more rapidly than almost anyone foresaw. Investment income, courtesy of the financial recession and slower economic growth, has deteriorated. Interest rates hit rock bottom and have remained there. For how long no one knows, but given the enduring weakness of Western economies, central banks are likely to keep them low for some time.
What to do about federal retirement benefits has produced many debates but few decisions. The Harper government did introduce Pooled Registered Pension Plans that look, walk and smell like group RRSPs, and are therefore likely to be of limited use.
No consensus has emerged about the Canada Pension Plan, a joint federal-provincial responsibility. The Harper government thinks the economy is too fragile to take contribution hikes, and doesn’t like anything that resembles higher taxes.
Labour argues that only mandatory contributions work; voluntary ones will cover only people with lots of spare cash, a minority of the population. Raise the contributions, labour says, and give lower-income people a better pension. Make more employers have private pension plans – to which small business screams about another cost.
CPP rates eventually are going to rise, either across the board or by having an additional compulsory contribution go into an individual’s plan. Or, governments could acknowledge that seniors’ needs for drugs are almost universal, and so add drugs for seniors to the CPP, paid for by higher contributions, an initiative that would meet a genuine social need and extend the spirit of medicare in a financially responsible fashion.