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Discarded placards overflow from a garbage bin on Parliament Hill following a demonstration in support of Nortel pensioners on Parliament Hill in Ottawa, Wednesday October 21, 2009. THE CANADIAN PRESS/Adrian Wyld

Adrian Wyld/The Canadian Press

Poor Giulio Tremonti. Italy's finance minister not only has the thankless job of playing bad cop to his populist boss, Prime Minister Silvio Berlusconi. He's also got debt-strapped Europe's worst public finances to manage.

With the world's oldest population after Japan, a birth rate that makes Canadians look like prodigious procreators, and the cushiest public pensions anywhere, Italy is deep in the hole and sinking deeper by the day. Public pensions already account for about 30 per cent of government spending in Italy. Each passing year leaves fewer and fewer working Italians left to foot the pension bill for their elders. But the ballot-box clout of Italian seniors means any attempt to roll back benefits is a political suicide mission.

Italy may be one of the worst off, but all developed countries, along with China, will experience unprecedented economic and social pressure in coming decades as their populations grey. Few, if any, have prepared for the demographic tsunami that will hit them as the baby boom generation heads into its golden years.

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By comparison, Canadians have some reason to feel fiscally smug, with a public pension system considered one of the world's most financially sustainable.

There's only one catch: That system pays among the least generous government-sponsored benefits in the developed world.

It's a prudent approach, but it's laying the groundwork for a host of other problems.

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The proportion of seniors in Canada's population will balloon to as much as a quarter of the population by 2030, from 14 per cent now. Middle-class Canadians without a workplace pension plan or personal savings to fall back on face a sharp and sudden decline in living standards when they leave the work force.

With millions more retirees living on subsistence-level public pensions, the economy will see a lot less of the discretionary income that has normally fuelled consumer spending.

"An aging population leads to a slower-growing work force and that leads to slower economic growth," warns University of Toronto economics professor David Foot, who first outlined the impact of shifting demographics on the economy in the 1996 bestseller Boom, Bust & Echo.

"We've got to build these slower economic growth projections into our corporate strategic models and our government revenue projections. I don't think that realization has taken hold yet."

The tsunami on the horizon It wasn't supposed to turn out this way. When Canada's public pension system was set up in the 1960s, the economy and personal income were both growing rapidly. Women were flooding into the work force, generous defined-benefit pension plans provided by employers were becoming the norm and Registered Retirement Savings Plans were taking flight. Policy makers anticipated that most baby boomers wouldn't need government help in retirement.

Yet today three-quarters of Canadians in the private sector have no employer-sponsored retirement plan. Less than a third contribute to an RRSP and only a tiny fraction stash away the maximum allowed - 18 per cent of earnings up to $21,000 annually. A generation raised on immediate gratification has preferred to spend (usually on credit) rather than build up a nest egg.

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Forget the promise of early retirement. Millions of currently middle-income workers will be forced to hold down a job well past 65 and, even then, will face straitened circumstances when they do retire.

The coming crisis is one that politicians here are being forced to face up to as the first wave of the baby boom generation prepares to enter senior citizenship in 2011. The dilemma has many experts pushing for massive reform that would include an entirely new public plan to complement or even replace the Canada Pension Plan (CPP), company pensions and RRSPs. If Canadians won't voluntarily save enough, some experts contend, maybe it's time the government forced them to.

Some provinces have taken tentative steps to address the so-called pensions gap. Ottawa, meanwhile, has set up its own "research working group" on pension reform, led by Conservative MP Ted Menzies.

The biggest obstacle to any overhaul, however, may not be federal-provincial squabbling. The insurance industry and big banks, which manage hundreds of billions of dollars held in corporate pension plans and RRSPs, are lobbying fiercely to protect their turf against any incursion by Ottawa or the provinces. Pension reform could be to Canada what health care reform has become south of the border - a lightning rod for critics of government intervention.

Mr. Menzies has appeared reluctant to endorse a compulsory government-sponsored retirement plan to supplant private-sector savings schemes, suggesting the idea smacks of "a bit of a nanny state situation."

Yet, many experts believe stripping the private sector of a cash cow that has poorly served savers or, at the very least, creating a public-sector alternative to RRSPs and company pensions may be what's needed if the country is to weather the demographic time bomb that is about to go off.

"The statistics speak for themselves. We've got 11 million working Canadians with zero company-sponsored retirement pension plans … [RRSPs are]very underused and skewed to higher-income earners," says David Denison, chief executive officer of the CPP Investment Board, the arm's-length body entrusted with managing the CPP's $117-billion in assets. "I don't think it's a great leap to say, clearly, the [system]is not working."

The way ahead At the Rendez-Vous 50 Plus, a community centre for retired people in Montreal's weather-beaten St-Michel district, Thérèse Fex and Bibiane Fontaine are toiling nearly as diligently as they did during their combined eight decades in the work force.

Ms. Fex, a petite 75-year-old widow with a ready smile, volunteers several days a week, preparing the meals the centre delivers to dozens of shut-ins around the neighbourhood. Ms. Fontaine, a lanky 72-year-old who loves driving, shuttles area seniors to their medical appointments.

Each woman held down a full-time job for decades. Ms. Fex worked at a pharmacy postal counter, Ms. Fontaine in a school cafeteria, but neither had much to show for it when she retired. Without a company pension plan to contribute to during their working lives, Ms. Fex and Ms. Fontaine now depend entirely on federal Old Age Security (OAS) benefits and the accompanying Guaranteed Income Supplement (GIS), a top-up program for the poorest seniors. Adding up those benefits and small sums from the Quebec equivalent of the CPP, Ms. Fex gets around $1,300 a month, Ms. Fontaine a bit more than $1,200.

"At least I can eat three times a day and I have an apartment," Ms. Fex offers. "And I'm better off than a single mother with six children living on welfare."

Perhaps. But if their expenses were to rise, they would be hard-pressed to cope. With a swelling proportion of Canadians set to enjoy this sort of threadbare existence, debate is intensifying about whether the payouts are generous enough.

OAS and GIS are the first pillar of Canada's public pension system, providing a basic level of support to those with no other sources of retirement income. Together, the programs, which are paid directly out of federal coffers, provide benefits totalling $14,034 annually. The second pillar of the public system consists of the CPP and Quebec Pension Plan. Almost all Canadians with jobs must contribute to one or the other.

Currently, CPP and QPP premiums are set at 9.9 per cent of income (up to $46,300), with contributions split equally between employers and employees.

A retiree who qualifies for the maximum CPP/QPP benefit in 2009 of about $10,905 does not qualify for GIS, but receives $6,204 in OAS, for a total of $17,109.

In 2005, Canada had the fifth-lowest seniors' poverty rate among the 30 nations belonging to the Organization for Economic Co-operation and Development. Only 4.4 per cent of Canadians over 65 were considered poor that year, compared with more than 30 per cent of Irish seniors and a quarter of American seniors.

But Susan Eng, vice-president of CARP, a group that advocates for public policy changes on behalf of Canadians over 50, counters that the official poverty statistics mask the increasingly severe financial hardship faced by urban seniors in this country.

"The [OAS, GIS and CPP]have lifted people out of abject poverty, but they haven't taken them out of poverty altogether," Ms. Eng says. "If they have one slip and fall, one problem with their mortgage, one fraud event, that's it, they drop deep into poverty and they can't get back out."

This year, Ottawa will spend more than $35-billion, or 14.5 per cent of all program expenditures, on elderly benefits. Even without raising benefit levels in real terms, seniors' pensions will cost $45.5-billion more by 2014 and account for 17.4 per cent of all program spending. No other federal program costs as much.

What's more, any benefit increase now would raise questions of intergenerational equity. Some younger taxpayers might resent having to pay for their elders' failure to prepare for retirement. Don't blame the boomers, Ms. Eng retorts: "They didn't have a good vehicle to save with."

RRSPs have proved inadequate for most, and also illustrate the challenge individuals face in financial planning. No one knows how much they'll need in retirement, principally because no one knows how long they'll live. Hence, people either oversave or, more typically, undersave.

A public plan such as the CPP overcomes this dilemma, since it is possible to plan for average, rather than individual, life expectancy. As well, the cost of running a large fund like the CPP at 0.16 per cent of assets annually is a fraction of the 2 per cent or so charged by most mutual fund companies.

After 41 years of work, he recycles bottles for extra cash

Exploring the options The CPP has worked so well that a host of influential pension experts are recommending that Ottawa either expand the plan so that it pays higher benefits, or create an entirely new, more generous scheme based on the CPP model.

Among the ideas being floated are:

  • A Universal Pension Plan, proposed by CARP. A UPP would replace the CPP and, like the latter, enrolment would be mandatory for all working Canadians. Premiums would rise to about 19 per cent of earnings split equally between employers and employees from the CPP's current 9.9 per cent. Maximum pensionable earnings would rise to $116,000 from $46,000. The upside is that the UPP would pay out benefits equal to 70 per cent of pre-retirement earnings, compared with 25 per cent for the CPP.
  • The Canada Supplementary Pension Plan proposed by Keith Ambachtsheer, director of the International Centre for Pension Management at the University of Toronto. The CSPP would complement, not replace, the CPP. Enrolment would be automatic for people earning more than $30,000 a year, though individuals could opt out. Premiums would be set to provide combined benefits (from all pensions) equivalent to 60 per cent of pre-retirement earnings.
  • The so-called ABC Plan, proposed by a joint Alberta-British Columbia commission on pension reform. Enrolment in this plan would be voluntary and open to any individual or company in the two provinces. This defined-contribution plan would supplement the CPP.

The ABC proposal has raised the prospect of a patchwork of regional pension plans, with varying levels of retirement protection across the country. The only way to avoid that, Ms. Eng says, is to create a national plan that's mandatory for all working Canadians. But she's worried Ottawa is reluctant to act, lest it anger the financial services industry.

"They've got the investment advisory industry whispering in their ear, saying [the UPP]would amount to a government takeover of private industry," she says.

Mr. Ambachtsheer says the "opt-out" clause included in his plan would enable the CSPP to benefit from economies of scale without resorting to the coercion implicit in the UPP or preventing competition with the public plan.

"There are all sorts of good reasons why, in a collective sense, we're better off having these arm's-length plans that manage [money]on behalf of hundreds of thousands or even millions of Canadians at the same time," he says. "But do we as a country want to put all our pension eggs in one basket? And shouldn't we give people some choice?"

Mr. Menzies, the Conservative MP who's heading Ottawa's research group on pension reform and who initially appeared leery of a new compulsory plan, insists he hasn't reached any conclusions. He is to report his findings at a first ministers' conference in December.

"We may come up with a whole new set of ideas out of this research. That's what research is for," he says. "There may be better systems in the private sector that we can encourage."

Though he has steered clear of endorsing any specific proposal, Mr. Denison of the CPP Investment Board suggests a "hybrid" model consisting of a supplemental CPP in which enrolment would be mandatory, combined with a set of voluntary schemes.

No reform, however broad, is likely to offer a failsafe parachute for the thousands of Canadians who are ill-prepared for imminent retirement.

"If someone is 60 years old now and has not saved for his or her retirement, whatever happens now is not going to offset the fact that he or she was not saving enough for 30 or 35 years," Mr. Denison says. "What we can do is change course for the future."

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