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Retirement savings

December 04, 2013

What’s wrong with Canada’s pension system?

Four questions about our retirement income system that refuse to go away. And one blog post that puts it all into perspective.

Is our country’s retirement income system delivering a viable financial future to Canadians and can we count on it to continue to do so?

Our highly touted three-pillar system is straightforward enough. Pillar one provides government-funded benefits on a universal basis to Canadian seniors. This includes Old Age Security, the Guaranteed Income Supplement and a spousal/common-law partner allowance. The Canada Pension Plan (CPP) and Quebec Pension Plan make up the second pillar. The third is a mix of employer-sponsored and individually accumulated retirement savings.

But there is a mountain of complexity resting on this simple structure. I’ve been writing about pensions in this country since 1996, and the debate over our retirement income system has never let up.

Four big-picture questions:

1. What can be done to incentivize Canadians to save more?

Arguably, enough has been done already. The tax benefits provided by registered accounts like the Registered Retirement Savings Plan and Tax-Free Savings Account have nudged Canadians to save for many years. Sure, you could tweak the rules to further promote savings. But fundamentally, the system is effective in the sense that most Canadians (other than those with very low incomes) fail to save at their own peril.

2. What can be done to promote workplace pension coverage across the country?

Again, tax incentives work. Those in place to promote employer sponsorship have had a positive effect. The marketplace works, too. Employers that have to compete for talent depend on deferred compensation — employee health benefits and retirement plans — to lure talent. Industry studies consistently show that these have an impact on Canadians’ decisions to join (or not join) a company. The real gap in this area is with small employers who feel they need not offer retirement plans to compete for talent or who can’t afford to do it on their own. The Pooled Registered Pension Plan makes a lot of sense, in my opinion.

3. What should be done to maintain a level of defined benefit (DB) pension plan coverage?

Many argue that decisions by employers to stop offering membership in their DB funds to new employees will have a significantly detrimental effect on the financial well-being of future retirees. This is a fair point, but it’s a bit academic. DB plans — which guarantee a level of retirement income to members based on calculations that typically factor in years of service and salary earned, regardless of the investment returns those pension assets earn for the employer that sponsors the plan — are expensive to operate. Saying employers should continue sponsoring DB funds is no different than saying companies should pay better salaries. You can make an argument for it, but you can’t ignore the costs involved. For many employers, defined contribution plans are a more affordable, sensible alternative.

4. Should more be provided in the way of government-funded benefits?

Does Canada need more CPP? Again, easy to answer in theory. But of course a bigger CPP promise comes with bigger CPP contributions, probably from you and your employer. That’s a problematic solution in this economy.

Amidst the frustrating complexity, my friend Lee Anne Davies over at Agenomics sent me a link to a refreshing piece she has to offer on the subject. It’s a little early to call it a holiday season post, but it absolutely works on that level. For me, it’s also a compelling reminder about why all of this matters so much.

Please check out Poverty risks for those aged 65 and older and let Lee Anne know how much you enjoyed her take.

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