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Who will pay to end the looming pension crisis? Add to ...

Frigid Whitehorse provided an apt setting for the opening skirmish in what is emerging as the next major battle over Canadian social policy. At this week's "pension summit," federal and provincial finance ministers began struggling over ways to repair Canada's patchwork system of retirement income security.

The spoils of this conflict are clear: whether the income security of future Canadian retirees will be ensured by private markets and individual choices, or by public programs and collective choices. The impending battle will be intense, because vested interests and entrenched ideologies are implicated. Already, the various forces can be seen taking their positions.

On the left bank are ragtag contingents from the Canadian Labour Congress, the Caledon Institute of Social Policy and the Canadian Association of Retired Persons. The left bank armies are fighting to expand the Canada Pension Plan, to make sure that all Canadians can eventually retire with an adequate income, no matter how much they save privately or how their investments turn out.

Assembling on the right bank are smartly uniformed troops from the financial, investment, pension and tax advisory legions. The right bank armies are waging a valiant effort to buttress workplace pension plans and private saving schemes, hoping to thwart the Big-CPP forces.

Lest anyone think that Big-CPP proponents are just dreamy revolutionaries, two veterans who are familiar with the landscape are now approaching the left bank. Bernard Dussault, the former chief actuary of the CPP, and David Denison, the head of the CPP Investment Board, are both mapping potential Big-CPP strategies.

The CPP currently covers all employees and self-employed persons on their earnings up to $46,300 a year, with retirement pensions paid at 25 per cent of the worker's average insured earnings. The maximum annual benefits are $10,900, and the average benefits are just $6,000, far below full-time earnings. To finance the scheme, workers and employers each pay premiums that are 4.95 per cent of insured earnings.

Big-CPP fighters have their sights set on at least doubling the benefit rate to 50 per cent, others would fight for 70 per cent, and some aim to raise covered earnings to $70,000 or higher. Their schemes would raise the maximum benefits from threefold to sevenfold. Even for moderate earnings, the benefit would be at least doubled. As in all wars, the expansion of CPP would be costly, carrying with it a large hike in premium rates.

Opponents of Big-CPP insist that the current system of workplace pensions and tax-assisted savings can be remedied. Their arsenal includes a managed voluntary "multi-employer" pension plan, an improvement of the financial security of workplace pensions and an enhancement of the income-tax treatment of individual savings.

While workplace pensions and individual savings incentives could unquestionably be improved, those reforms still fall short of making sure that Canadians have retirement-income security. Arguments favouring a significant expansion of CPP flow directly from an economic analysis of public versus private pensions and individual saving behaviour.

A public pension plan can overcome the crucial barriers to adequate private savings for retirement: myopia that leads to inadequate saving; the high costs and risks associated with individual investing; lack of investment expertise; impediments to individuals' insuring themselves against longevity and inflation risk; and incentives for employer pension plans to shrink and to shift more risk onto employees.


Despite the existing provisions, many people at all income levels fail to save adequately for their retirement needs. Current spending imperatives often cloud people's perception of their future income needs, although they later regret their choices. Workplace pension plans are very limited outside the public sector and have become scarcer and weaker. The "forced savings" aspect of a mandatory universal public pension scheme can address these gaps.

Even when people do save enough for retirement, they face significant difficulties in investing, which many cannot handle. Investing through mutual funds carries high management fees, often consuming one-third or more of the total real returns. Professional investment advice is costly and of varying quality. Even seasoned investors can make mistakes or suffer misfortunes from which they cannot recover before they retire.

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