Canadians make their journey through retirement in different ways. About 2.7 million public sector workers (more than 80% of the public sector) travel first-class as members of defined-benefit (DB) pension plans. After a 30-year career, a worker earning $80,000 will have an indexed pension integrated with the Canada Pension Plan that pays $48,000 per year for life and is worth about $1 million.
The 23% of private sector workers with pension plans are mostly travelling coach. Many belong to defined-contribution (DC) pension plans that don’t promise a guaranteed pension. DB Benefits for private sector workers tend to be modest and are rarely indexed. There is also the risk of not getting a full pension if an employer goes bankrupt.
With no pension plans, the remaining 77% of private sector workers (10.6 million) are travelling standby, relying entirely on RRSPs and other forms of saving to prepare for retirement. Statistics Canada reports that at retirement, median retirement savings for Canadian families amount to less than $250,000 – about one-eighth of the pension savings of a public sector couple earning $80,000 each after a 30-year career.
It’s clear that that Canada’s retirement saving system is profoundly unfair to private sector workers. Most can save only 18% of their annual income in a DC plan or RRSP, compared to the 40% of salary a 55-year-old public sector worker can accumulate in pension and RRSP savings. Even if they want to join pension plans and fund them with their own money, private sector workers can’t because the federal and provincial pension rules don’t allow it. You’re allowed to have a good pension only if you’re lucky enough to find someone else to pay for it. If your employer doesn’t sponsor a pension plan, or if you are self-employed, you’re out of luck.
To make the system fair, so that everyone has the opportunity to upgrade to a first-class pension, four things need to happen:
– First, complex tax rules that limit annual pension and RRSP contributions need to be replaced with a single, lifetime savings limit of $1 million or more – the value of retirement savings that many public sector workers routinely accumulate.
– Second, tax rules and provincial pension rules need to change to allow all workers (including self-employed and home workers) to join pension plans and make contributions from any source of income.
– Third, provincial pension rules need to make it easier for employers and workers to join the kinds of multi-employer pension plans similar to the plans that work well for public sector workers.
The fourth thing that needs to happen starts with you. There has been no meaningful pension reform for a generation because Canada’s pension rules are so complex that Canadians haven’t understood how unfair they are. Now that you do understand, it’s up to you to make pension reform happen. How? Spread the word. Talk to your colleagues and friends. Call your federal and provincial elected representatives. Tell them to get on with the job of fixing Canada’s pension rules, so that you and those you care about have a better chance to enjoy a first-class retirement.