Informed View: Is Canada Due for Pension Reform?
By Rock Lefebvre
Incited by provincial and national debate over recent years, pension reform is clearly on the minds of Canadians. Aggravated by the decline of company sponsored pension plans and a challenged economy, many Canadians prospect that retirement may have to be delayed, notwithstanding diminished expectations of their own retirement bounty.
Some will argue that the conservatism that has haunted employer-sponsored defined benefit pension plans since the new millennium is to blame while some may elude to the woes of government constructs such as Old Age Security, Guaranteed Income Supplement, the Canada or Quebec Pension Plan. Others may further underscore the ails of Registered Retirement Savings Plans (RRSPs), particularly in the current low interest rate environment.
The truth of the matter is that these devices work as they have been designed to. And as imperfect as they may seem to be, these retirement instruments represent Canada’s retirement pillars. Taken together, policy setters have long recognized that while there is room for improvement, the system’s outlook may not be as bleak as we sometimes construe. Moreover, retirement needs are assessed through multiple lenses – sometimes cultural, sometimes economic, sometimes political, and oftentimes emotional.
A recent paper issued by the C.D. Howe Institute postulates a different and interesting approach to assessing Canadians’ readiness for retirement and posits that relying on absolute Canadian savings rates is misleading. While the paper does merit reading, suffice it to say that a solid argument is made to set aside the “household savings rate” as calculated by Statistics Canada when examining the economic state of Canadians. We must concede that the official savings rate will typically decline as Canadian boomers head into retirement due in large part to a couple of important reasons. First, those in, or entering, the retirement phase will simply save less and consequently lower the overall savings rate. Secondly, in calculating the savings rate, money withdrawn by retirees in the form of benefits is subtracted from aggregate savings; serving to further misrepresent the actual state of retirement readiness in Canada. Taken also with the fact that the savings rate ignores CPP contributions, a solid and acceptable argument can be made that “household savings” is less of a beacon than we might have hoped for.
The debate is rightfully shifting. As advanced by the C.D. Howe Institute1, other important measures such as net worth of the average household (increasing 76% between 1999 and 2012 after inflation) and aggregate pension assets (having more than doubled from a level of 1.5 times employment earnings in 1990 to 3.2 times employment earnings in 2012) need to find their way into our collective assessments.
Principals of the Human Resources Management Association (HRMA) and of the Canadian Council of Human Resources Associations (CCHRA) have formally and anecdotally monitored and otherwise weighed into the pension debate over the last decade. Many of us recognize that some Canadians are on track and others are in fact over-saving, while as much as an estimated 20 per cent of the middle income cohort are prophesied to experience a substantial dip in disposable income as they enter retirement.
Without belabouring the merits and shortcomings of current retirement constructs or of the initiatives afoot across Canadian jurisdictions to bolster retirement security, HRMA and CCHRA support the notion that the interests of employers, of workers and of the whole are best served to sustain Canada`s current regime – emphasizing, and improving where possible, each of its current retirement pillars.
The reality of the matter is that much of the global economy remains vulnerable and that Canadians continue to prioritize important issues focusing on economic growth, job creation, skills training, innovation, infrastructure, energy, and health. As such, it is contented that sweeping pension reforms or government intervention are untimely, and that the introduction of mandatory supplements to the current retirement pillars will exacerbate the fragility of the Canadian economy – effectively adding stress and costs onto employers, working Canadians, and government bureaucracy. Concurrently, it should be noted that many have long held the view that disjointed ‘tinkering’ may cause greater harm than good.
CCHRA and HRMA alike continue to applaud the efforts of organizations which voluntarily extend employer-sponsored pension and retirement arrangements and to Canadians who commendably assume responsibility for their financial well-being by contributing to personal savings devices inclusive of RRSPs. Discussed in many forums over recent years, we do encourage federal government consideration to expand more aggressively the Canada Pension Plan`s maximum annual pensionable earnings limit ($53,600 in 2015) and, in the instance of RRSPs, relaxing the 18 per cent previous year`s earned income limit.
Rock Lefebvre is Chief Regulatory Officer at HRMA.
1. Malcolm Hamilton, Do Canadians Save Too Little?, C.D. Howe Institute, Commentary No. 428, June 2015