If every Canadian worked for the government – not an idea we're recommending, so bear with us – Canada would not be facing a retirement crisis, or even much of a retirement challenge. In the public sector, 86 per cent of workers are part of a pension plan, according to the Office of the Superintendent of Financial Institutions. Most are enrolled in what are known as defined benefit plans, the gold standard, traditional pension, offering a guaranteed payout at retirement.
But out here in the private sector, where the overwhelming majority of Canadians work, it's a different story. Most workers – a whopping 76 per cent – have no pension plan at all, and that number has been steadily rising for years. And those few companies offering retirement plans are increasingly turning their backs on defined benefit pensions.
Between 2001 and 2011, the share of private-sector pension plan members enrolled in a defined benefit plan fell from 74 per cent to just 51 per cent. Companies have also been rapidly shifting to what are known as defined contribution pension plans, which can be cheaper to operate because they're really just individual savings plans, not true pensions. Risks aren't pooled among contributors and across time, and nothing is guaranteed.
In other words, in private-sector Canada, only one in nine workers has a traditional pension plan. Another one in nine have second-best, sort-of pension plans. And nearly eight out of 10 private-sector workers have no pension at all.
Those clouds on the horizon contrast uncomfortably with the current, sunny state of senior Canada. Poverty among the elderly, once widespread, is nearly non-existent. And few retirees in the middle class are at risk of falling out of it. Seniors have never had it so good – and the next generation deserves as good, or better.
But thanks to changes in the economy, which logically provoked a pullback in employer pension offerings, the future of retirement threatens to be less rosy than its present. The next generation of retirees could be, on average, less well off than their parents. The good news is, it's fixable.
Earlier this week, we looked at some fixes, to improve the lot of seniors without imposing undue burdens on taxpayers.
The long-standing practice of forcing seniors to convert their RRSPs into RRIFs at age 71, and obliging them to withdraw a high and increasing percentage of their nest eggs, should be done away with.
The Harper government should also back off its plan to double TFSA contribution room. The relatively new TFSA is wonderful for savers, but its promise of tax-free withdrawals will eventually create a huge pool of tax-exempt seniors income, effectively placing too much of the cost of government on a shrinking number of taxpayers. And though the TFSA was created with low-income Canadians in mind, the people most able to take advantage of it are upper-income.
If the government really wants to benefit wealthier Canadians, it should do so in a way that doesn't take out a mortgage against future taxpayers. It should raise RRSP and pension-plan contribution ceilings, which currently restrict tax-sheltered savings to incomes less than roughly $140,000. It could also raise the maximum annual contribution limit above 18 per cent of income.
But those moves are just tinkering around the edges of Canada's retirement challenge. Abandoning TFSA expansion will benefit future taxpayers, but it won't do anything for retirees. Raising RRSP and pension contribution limits will only help higher earners. And giving seniors the freedom to decide when to withdraw money from their RRIFs will offer them flexibility in managing their retirement savings – but it won't do anything to ensure they have enough savings.
Ensuring that everyone has adequate savings and income, and doing so without imposing new burdens on future taxpayers, calls for something more ambitious. It calls for an expansion of the Canada Pension Plan – and a more generous but also more targeted Old Age Security program.
The CPP is an actuarially sound, exceptionally well-run, defined-benefit pension plan. All workers are covered, and their pensions really are guaranteed. CPP's sole defect is its modesty. It only covers incomes below roughly $54,000, and it aims to replace just 25 per cent of that income in retirement. The average retiree today is receiving a meagre $650 a month from CPP, and the maximum pension, after a lifetime of maximum contributions, is less than $1,100.
In a world where corporate pensions are retrenching, it makes sense for the national pension plan, portable across provinces and movable between jobs, to get more ambitious.
The way to do that is by gradually increasing CPP savings and CPP benefits, by raising the income ceiling and contribution rates. For example, a plan championed by Prince Edward Island in 2013 and backed by several other provinces would over many years increase contributions – currently 9.9 per cent of income, split between employers and employees – to 13 per cent. The income ceiling would be roughly doubled to $100,000. The result would be a CPP pension replacing 40 per cent of earnings in retirement, instead of the current 25 per cent.
That would spell a more secure and certain retirement for the next generation of seniors. But expanding savings through CPP would have another enormous consequence: It would lower the price of the OAS program, which currently costs Ottawa $46-billion a year, and climbing rapidly. OAS, unlike CPP, is paid for entirely by current taxpayers. That's not sustainable in a country where the ratio of workers per retiree is expected to fall from 4:1 to 2:1 in a generation.
The Harper government came up with a solution to the coming explosion in OAS costs – but it threatens to increase poverty among low-income seniors. There is a better way. We'll lay it out on Tuesday.