Pension plans fail mid-income earners: report

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There are shortfalls in both government and private-sector pension programs in Canada, leaving middle-income earners especially vulnerable to retiring with inadequate incomes, according to a new report by a provincial committee examining pension reforms.

The report suggests a bleaker outcome for future retirees than a similar paper commissioned by the federal government from tax expert Jack Mintz and released in December at a meeting of finance ministers in Whitehorse.

While Mr. Mintz's report suggested Canada does not have a major pension problem that needs fixing, the provincial report says government pensions in other major developed countries provide far more income to retirees than Canada's public plans, while private-sector pension coverage in Canada is declining.

"Shortfalls appear to exist in both the mandatory and voluntary parts of Canada's retirement income system," the paper argues. "Specifically, those earning between approximately $30,000 and $100,000 appear to be the most vulnerable."

And while most of today's retirees have sufficient income to maintain their pre-retirement lifestyles, "concerns have been raised about the fate of future retirees," it adds.

The report was prepared by a steering committee of provincial finance ministers studying pension issues in Canada, and was released Thursday by B.C. Finance Minister Colin Hansen, who is chairman of the committee. While the paper was previously confidential, the ministers released it "to aid in public discussion" of pension reform, Mr. Hansen said in statement.

The study analyzes various proposals for reform, including expanding the Canada Pension Plan or creating a new voluntary supplementary pension plan, but does not make recommendations about which choices should be adopted, and notes other options are also on the table for analysis.

However, it says both an expanded CPP or a new supplementary pension plan would have the advantages of scale with lower costs and access to expert administration and investment management. It also says both options could be applied only to middle-income earners, which it argues are most in need of pension assistance.

While the report largely outlines options for new government-led pension programs, it also suggests there could be room for private companies in a new system, suggesting they could be involved in administration, investment management, custodianship or in converting assets into annuities on retirement.

The provincial steering committee report said Canada's pension system provides less "income replacement" - the amount of retirement income compared to pre-retirement earnings - than programs in other major countries.

The Old Age Security program and the Canada Pension Plan are designed to provide about 40 per cent income replacement for those earning up to the national average wage of $46,300 a year, the report says. But a World Bank study in 2007 concluded Canada's government pension plans contribute "considerably less" to middle-income and higher-income earners than programs in other Organization for Economic Co-operation and Development countries.

While Canada ranks thirteenth in the OECD in income replacement for people earning half the national average wage, it ranks 20th out of 30 OECD countries for those earning the national average wage before retirement, and 26th for those earning 1.5 times the average wage before retirement.