Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. He also hosts a weekly conference call called Monday Morning Jump Start, which is about strategies for financial advisors. Advisors can see it GlobeAdvisor.com. He can be reached at email@example.com
'Retirement security is the central policy issue of our time."
That was the view expressed during a recent conversation with Olivia Mitchell of the University of Pennsylvania's Wharton School, arguably today's foremost authority on this topic.
As if to prove her point, a report just released by the U.S. Center for Retirement Research found that 51 per cent of Americans are at risk of reduced living standards in retirement - including 42 per cent in high-income households.
Here in Canada, countless headlines and attention have been devoted to the subject of inadequate pensions, for which a broad range of contradictory prescriptions has been tabled:
- Tighten standards for how companies fund pension plan liabilities - or loosen them.
- Place employee pension plans at the front of the line when companies go bankrupt - or continue to treat them like other creditors.
- Increase mandatory pension contributions - or leave them at individuals' discretion.
- Direct retirement savings to low-cost government plans - or leave this up to the private sector, which manages these now.
I'm reminded of the words of American essayist H.L. Mencken: "For every complex problem, there is a solution that is simple, neat ... and wrong." We need to strip away the rhetoric and start with four core realities:
1) These problems have been years in the making
Scott Perkin of the Association of Canadian Pension Management, the organization that represents companies that have pensions, says the roots of today's problems have grown for many years.
"The last 12 months haven't caused today's pension problems; they've just accelerated and highlighted them," he says. "The issues today have arisen over a period of decades and were merely compounded by last year's markets."
It's worth noting that a relatively small number of retirees have seen their pensions reduced because of companies going bankrupt, with the media attention to this entirely out of proportion to the actual numbers affected.
Consulting actuary Malcolm Hamilton of Mercers says, while it's unfortunate that Nortel Networks Corp. pensioners might lose 30 per cent of their pensions, that loss is no different from what many Canadians managing their own pensions experienced last year - and that, as good public policy, it doesn't make sense to bail out one group of retirees at the expense of others.
2) New solutions are needed for the self-employed
Given the rising number of self-employed Canadians, we need to look at new options to encourage people to save for their retirements. These might include expanding RRSP room and adapting some vehicles, such as Individual Pension Plans, currently targeted to mid-sized businesses, to smaller companies and self-employed Canadians at a sensible price.
3) Many Canadians need to focus on retirement savings
Cartoonist Walt Kelly is remembered for the line: "We have met the enemy and he is us." That applies to the pension issue - many Canadians need to give their retirement savings greater priority.
I recently had a conversation with the chief executive officer of a mid-sized company who wound down a costly pension plan in large measure because employees weren't valuing it. He redirected the savings into an enhanced benefit plan - and commented that employees seemed happier with the immediate gratification of improved benefits compared with the delayed gratification of a pension plan.
The first requirement for fundamental change is broad recognition that the status quo is not an option. If there's any silver lining in today's pension problems, it's that retirement income and pensions have moved up the policy agenda.
In some cases, companies need to ramp up their obligation to fund employees' retirement. To make that happen, though, Canadians need to place greater value on the support they get from their employers and be willing to make sacrifices today to secure their financial futures tomorrow. Only in that way will companies voluntarily fund retirement savings.
4) No quick solutions
A recent newspaper column talked about the dramatic drop in automobile deaths per mile since the 1960s. A number of things came together to make that happen - consumer and government pressure to make safer cars, better auto testing and a shift in consumer values on issues like drunk driving.
We need to accept that solving the pension problem won't be done in one big step, but rather through a number of actions that will take effect over time. The focus on pensions has created an opportunity for a serious debate. The key to a productive debate, however, is to turn down the rhetoric and turn up the substantive discourse.