Four of the most impotent words in personal finance are “save more for retirement.”
Three of the most powerful words are “deducted at source.”
Human nature explains why governments have to get more involved in retirement saving. If we want to ensure people have sufficient income when they retire, we need pension plans that take money off the top and make saving non-discretionary.
The budget issued last week by Ontario’s Liberal government proposed a new retirement pension plan that will undoubtedly become a talking point in the provincial election campaign that officially starts Wednesday. A week earlier, the federal government issued a proposal for a type of workplace pension where employers and workers share the risks. Both the Ontario and federal plans are designed to make people better prepared for retirement, and they’re both smart policy.
Let’s not overdramatize our retirement readiness deficit as a nation. Both the Canada Pension Plan and Old Age Security are well-funded, many people are putting money in registered retirement savings plans and our seniors have a low poverty rate by global standards. The challenge is our aging population – if seniors aren’t financially independent, they will be a burden on both governments and the economy in the decades ahead.
Are we putting enough money away for retirement to prevent this from happening? Statistics Canada says total contributions to RRSPs rose 3.8 per cent from 2011 to 2012, the most recent year for which there are numbers. However, the number of RRSP contributors was virtually unchanged from 2011, and the percentage of tax filers who put money in an RRSP fell a bit to 23.7 per cent from 24 per cent. The RRSP savings pool gets deeper, but not wider.
On pension plan coverage, Statscan says the proportion of employees with company pensions fell to 38.4 per cent in 2011 from 38.8 per cent in the previous year. Membership in defined benefit plans edged just a bit lower, while defined contribution plan membership rose 3.5 per cent. The quick version of these numbers: Pension coverage is declining, and so is pension quality. DB plans make payments for life of a preset amount of monthly income; with DC plans, your retirement income is a function of how well your investments do.
Some of our best financial minds have studied numbers like these and decided that people won’t have enough income in retirement to live comfortably and independently. “…On average, Canadian workers are far from saving enough to support in retirement a standard of living that they would find satisfactory,” former Bank of Canada governor David Dodge and economist Richard Dion wrote in a recent report written for the Ontario government.
Jim Leech, former CEO of the giant Ontario Teachers’ Pension Plan, told me in a Q&A we did last fall that people in the $30,000 to $100,000 income range are particularly unprepared for retirement (read more here). Mr. Leech is the co-author, along with The Globe and Mail’s Jacquie McNish, of a book called The Third Rail: Confronting Our Pension Failures.
Ontario’s Liberals have aimed their new plan at the three million workers who don’t have access to workplace pensions and aren’t in a federally regulated business such as banking. The idea is to build on benefits paid by the Canada Pension Plan, which pays average benefits of $6,400 per year and tops out at $12,459.96. Workers would contribute 1.9 per cent of their income up to $90,000 a year, and employers would make matching payments.
Opponents of plans such as this, including an enhanced CPP, say employers and workers can’t afford the costs. But what if these costs were seen as a way of forestalling governments of the future from raising taxes to support retirees who didn’t save enough?
A second objection to enhanced public pensions is that they’re under the control of money-wasting governments that can’t be trusted. But the CPP, and presumably plans modelled on it, are not subject to government interference. The CPP Investment Board is an efficient mega-investing enterprise with a fine 7.4-per-cent annualized rate of return over the past 10 years.
The federal government’s proposal for target benefit workplace pension plans generates a different set of issues. If a target plan performs according to expectation, workers get a level, predictable payment and, possibly, cost of living increases. If a plan falters, increases may be chopped or, in a worse case, benefits cut. In a world where employers are increasingly rejecting the DB pension model as unsustainable, the government’s target benefit plan sounds like a better option than leaving workers in DC plans that provide zero certainty about retirement income.
We can’t give up on urging people to save more for retirement on their own, but let’s recognize that the track record for advocacy like this is weak. We need retirement programs where savings are deducted at source.