In the spring of 2012, the Prime Minister surprised Canadians, including his own caucus, when he proclaimed from the high perch of Davos, Switzerland that Canadians’ pension system was about to change. With that, with none of it being discussed in the 2011 election, the 2012 budget changed the age at which Canadians qualify for CPP to 67. None of this — not Old Age Security (OAS), Guaranteed Income Supplement (GIS) or the CPP — were mooted as a target for new policies in the election. If mentioned at all, it was only to assure Canadians that pensions were secure.

The general narrative put forth now sounds plausible. The demographic shape of Canadian society is changing. More of us will be older as those born in the post war baby boom, roughly from 1947 to 1957, enter our senior years. In fact, sometime between 2015 and 2021, it is estimated that for the first time in Canadian history, seniors will outnumber young people under the age of 14.

Piggy BankThe story is that all of us will be old and far too few young people will be around to work to generate the wealth to cover our pensions. These simple assumptions miss critical factors. No one anticipates that the Gross National Product (GDP) will collapse with fewer workers. We assume the GDP grows because we anticipate the economy will be buoyed by immigration and by less labour intensive economic activity.

The Parliamentary Budget Office (PBO) 2012 report stated that, having off-loaded 2% of health care costs on the provinces, Ottawa had room to absorb the bump created by retiring baby boomers. In fact, the PBO report says we can increase OAS. Pension reforms must be built upon the system that will best create decent pensions that will keep the elderly out of poverty, require minimum additional contributions and have low administrative and investment costs.

The only system that is capable of meeting these goals is the CPP — a proven system that is the envy of many countries. Its systems can be modified to offer enhanced benefits. But, we do need reforms and we need to prepare for a future in which too few workers have pensions. We need to target the alarming decline in working age Canadians with workplace pensions.

National Pension Reform

Unfortunately, the Harper administration has continued to sabotage efforts at national pension reform.

At the annual December 2013 meeting of Federal, Provincial and Territorial Ministers of Finance, most provinces, led by PEI, were preparing to move ahead with assessing a series of phased in proposals to enhance the CPP, which over some 40 years, would increase the maximum CPP payable beyond the current 25% of the national industrial wage. Under consideration was an increase in the YMPE subject to CPP contributions from $52,500 in 2014 to something closer to international standards, which would be close to $110,000. (For comparison, the USA’s Social Security System assesses premiums of 12.4% on incomes up to $117,000.) In addition to increasing the YMPE, the co-operating provinces were considering an increase in the income replacement ratio of 25% of the YMPE to something more reasonable like 35% or 40%. A 25% income replacement rate was considered appropriate when most people had workplace based defined benefit pension plans, plus the Old Age Pension (OAP). The three plans — CPP + OAP + workplace pensions — were like a three legged stool, nice and stable as long as each leg was solid.

Unfortunately, this new found provincial co-operation was met with a blunt rejection by the federal government. Just like the countries attending the various international climate change talks, the provinces are learning how the Harper administration can sabotage positive efforts to improve conditions, be they controlling carbon emissions or enhancing retirement security for Canadians.

Canada’s future retirees face a crisis because the pension stool’s workplace pension leg has largely collapsed for most people in today’s private sector workforce, especially younger workers. Only 24% (28% a decade ago) of the current private sector labour force contributes to employer based pension plans. A decade ago, 74% of private sector pension plans were Defined Benefit (DB) plans, today they are below 51%. The problem is not that public sector workers have decent pensions, it is that 75% of private sector workers don’t. Remember, DB plans are the only plans that establish a workers right to collect a portion of their income as a deferred salary or pension upon retirement.

Defined Benefit Plans vs. Defined Contribution

Plans Too many private sector employers have used every economic challenge as an opportunity to abandon their defined benefit pension plans. (Never waste a crisis.) Sometimes they froze their DB plans (affecting some 480,000 employees since 2004) and converted employees’ future earnings to the lesser Defined Contribution (DC) pension plans, creating what the statisticians call hybrid plans. DB plans are much more efficient than DC plans in that they produce significantly higher pensions for the same contributions, yet DC plans get the same tax support.

In other cases, they just closed their DB plans and switched to DC plans where the member is at the complete mercy of the markets and DC plans usually more costly and have inferior professional investment services, or companies simply abandoned any kind of plan at all.

DC plans pay much lower pensions, which are subject to reductions once in pay when markets fall and rarely have any inflation protection. By abandoning DB pensions, the corporate sector is passing the buck to individuals and the government to care for today’s workers in their senior years. We know individuals are not picking up the slack, as only 32% of workers even contribute to RRSPs and their contributions remain low while debt levels soar to all time highs.

SeniorsAll the provinces know that most of today’s workers are facing a bleak retirement due to the collapse of the third leg on the pension stool, the employer based pension plans leg. They also know that enhancing the CPP will not negatively impact the economy today but will help support it when retirees have enough buying power to sustain some purchasing power as they age.

In a welcome return to playing a much more active role in the national policy stage, Ontario is picking up on the void created by the federal Conservatives.

Ontario’s Premier Wynne has announced a plan to create a new pension plan that could parallel the CPP to enable workers and their employers to supplement that third leg. She has announced a technical advisory board comprised of several widely respected experts in pensions policy to help develop an Ontario Retirement Security plan. Former PM Paul Martin is going to be an advisor on the issue as well and they have been asked to report later this spring.

Ontario has given some voice to opening up the process to other provinces to join in the talks. While it remains to be seen what will emerge through this effort, it is at least a glimmer of light on restoring more reliable pensions in the decades to come for today’s workers.

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