Governments in Canada have been struggling with pension reform for years. Frustrating as this might be, there is good reason to proceed with caution – it’s questionable whether we even have a retirement “crisis.”
Canada’s retirement system is among the best in the world. Most recent retirees have been able to maintain or even improve on their previous standards of living.
This is not to say we should ignore it. Low savings rates, longer life spans and lower future investment returns will almost certainly create problems. We believe certain affordable measures could meet these challenges head on and measurably improve our system.
Younger Canadians aren’t saving enough, and workplace pensions are suffering from neglect. In some provinces, just one private-sector worker in 10 is now covered under a defined-benefit pension plan, and private-sector coverage in any type of plan is declining. The gap between private- and public-sector coverage is giving rise to an untenable political tension, exerting continued pressure for dramatic cuts to public-sector pension benefits. If we are to preserve what is positive in these plans, reform is imperative.
Governments need to make swifter progress, in particular what we do with the Canada/Quebec Pension Plan (C/QPP), pooled retirement plans (PRPPs) and workplace plans. We have three recommendations.
First, a modest expansion of the C/QPP, targeted on the middle-income workers who are likely to face the biggest retirement income gap. Since Canadians retiring today are better off than we expect future retirees to be, this expansion should affect only future service. This ensures that those who receive a higher benefit will pay for it. The cost of a retroactive increase is prohibitive and would be borne unfairly by future generations. The current benefit is worth just 6 per cent of pay but we are contributing 9.9 per cent (more in Quebec) because we are playing catch-up with inadequately funded past improvements.
We suggest an increase in covered earnings from the current $51,100 to about $75,000, while the C/QPP benefit for future service should be increased from 25 to 35 per cent of earnings. These improvements should be tied to an increase in the retirement age to 67. A reduced benefit should still be payable at age 60.
Second, we endorse PRPPs as a new national retirement savings plan. Requiring employers to automatically enroll employees (who can still opt out) will significantly increase retirement savings.
Third, governments should foster an environment where workplace plans can thrive. Along with RRSPs, workplace plans are the best vehicle for retirement saving. Based on recent trends, we predict that the number of private-sector defined-benefit plans will decline, exacerbating the existing gap between private- and public-sector workers.
The best chance for reviving workplace plans and closing that gap is to allow employers to introduce new plan designs that share the risk between employers and employees. Sharing the risk of inadequate returns and longer life spans may be the only sustainable design for both public and private sectors. Shared-risk plans would benefit not only taxpayers but ultimately the public-sector plan members themselves, who might otherwise find themselves forced into riskier defined-contribution arrangements.
Some might argue that these measures don’t go far enough. We believe, however, that the bigger danger is that we spend more than we can afford to deal with a questionable crisis.
Bill Morneau is executive chairman and Fred Vettese is executive vice-president and chief actuary of Morneau Shepell. They are co-authors of The Real Retirement.