Prince Edward Island's finance minister is championing a proposal to increase both the contributions and the benefits in the Canada Pension Plan. While many Canadians won't appreciate the idea that Ottawa might impose a mandatory increase in retirement savings on them, we're not getting the job done by ourselves – and it is increasingly an issue of national economic security.
Wes Sheridan wants Ottawa to roughly double Canadians' maximum annual contribution to CPP – to $4,681 by 2016. The income level at which CPP contributions would max out would also be doubled, to $102,000 a year. In return, Canadians would roughly double their maximum annual benefits from CPP, to $23,400.
The idea is to secure more savings for middle-income Canadians, who are most at risk of not being able to save enough to comfortably retire. Low-income Canadians would likely get enough government support to cover their needs, and the rich are, well, rich – they'll be fine. It's the middle that have a problem.
How big a problem? That's a topic of debate. Traditionally, the rule of thumb has been that you need 70 per cent of your pre-retirement income. But some experts have argued that this is a wild over-estimation; 50 per cent, they say, may be adequate for the average retiree.
Let's split it down the middle, and say 60 per cent – as the C.D. Howe Institute did in a 2010 study. For the average Canadian individual (which, according to Statistics Canada, had pretax income of a little under $40,000 in 2011), that means having $24,000 a year in retirement income.
CPP currently pays 25 per cent of your income, up to a maximum of $12,000 a year. For a $40,000-a-year earner, it would pay $10,000 – but only if $40,000 was your average yearly earnings throughout your career. So in practice, CPP benefits are considerably less than 25 per cent of your current earnings; last year, the average payment was a little over $7,000. Let's split the difference and call it $8,500. Old Age Security pays another $6,500.
Add it all up, and you get $15,000 – leaving you $9,000 a year short.
The C.D. Howe study estimated that mid-range earners would have to save about 10 per cent of their pretax earnings, every year from age 30 to 65, to save enough to make up the gap. (This assumes after-inflation investment returns of 3 per cent annually – not an unusually conservative number, given the bleak state of returns in recent years.) It notes that average RRSP savings rates for people between 30 and 60 years old is 4 to 5 per cent – and average employer-sponsored pension plans contribute another 2 to 3 per cent.
So, on average, we are about 3 percentage points short, every year, of saving what we need. Add up 3 per cent of a $40,000 income every year for 35 years, and that's a $114,000 financial hole at retirement.
This is more than just a personal issue; it has potential to become a national economic crisis. The number of retirement-age Canadians is projected to double over the next 25 years, and the ability of this growing demographic to support itself is in question. More than 60 per cent of Canadian workers have no form of workplace pension at all. And government tax incentives for retirement savings aren't working: Fewer than one-quarter of Canadians make RRSP contributions at all, and the median contribution is less than 15 per cent of the annual limit.
Simply put, we're not doing it ourselves. If as a nation we don't secure the financial health of our future retirees now, the country's social and economic burden a couple of decades from now could be more than we can handle.