The pension crisis has sparked calls for a universal pension plan to cover Canadian workers without employer-sponsored pensions. Australia, Singapore and Chile have versions of the idea and it’s high time Canada followed suit.
This week CARP, the lobby group representing Canadians aged 45 or more, argued for a UPP that would help workers replace 70% of the income earned in their working lives.
Susan Eng, CARP’s vice-president, advocacy, presented details of a proposed mandatory extension to the Canada Pension Plan to the House of Commons standing committee on finance on Tuesday. She also unveiled details of a CARP survey that found 88% of its members support the idea.
The UPP being proposed resembles the Canada Supplementary Pension Plan (CSPP) unveiled last May by the C. D. Howe Institute and Keith Ambachtsheer, director of the Rotman International Centre for Pension Management.
One key difference in the CARP proposal is that Ms. Eng says UPP should be mandatory, while Mr. Ambachtsheer contends the CSPP should have an “opt-out” provision for employees. “If you’re going to be a true paternalistic libertarian you have to give people a chance to get out of something that may be good for them,” Mr. Ambachtsheer said yesterday.
Ms. Eng disagrees, saying that to get the economies of scale necessary to cut costs, such a plan needs to be mandatory. Neither proposal is cast in stone. Ms. Eng has called for a pension summit, an idea that hasn’t gotten Ottawa’s attention, she said.
Both plans target the 3.5 million Canadian workers — 25% of the workforce — that are on “an inadequate retirement savings track” according to the C. D. Howe Institute.
While CPP pays 25% of the maximum pensionable earnings of $46,300 in 2009, UPP would eventually replace 70% of income. That would not come without cost. The current 9.9% combined employer/ employee contribution rate would have to double to 20%.
Fully 50% of the 3,700 CARP members polled were willing to put away 10% of their salary to contribute to a UPP, while only 17.25% would save 18% (the basis for current maximum RRSP contributions).
Meanwhile, 53% of polled respondents say they need to replace 70% of working incomes, 14% thought they’d need more, and 30% felt they could get by with just 50% of the income they enjoyed while working.
London, Ont.-based financial advisor Jeff Wareham likes the UPP idea. “I believe it would be a good start to emulate the benefits paid by Social Security [in the United States]. The gap between Canadians and Americans is shocking.”
Ms. Eng described the UPP as a more secure defined-benefit plan, which assures retirees of a set benefit, like the CPP.
Mr. Ambachtsheer said his target is to replace 60% of working income, including current CPP and Old Age Security benefits. Unlike traditional defined-benefit plans, “no one guarantees it,” he said.
Mercer pension consultant Malcolm Hamilton views UPP as a variant of a defined-benefit plan and “as such, is not a practical way to proceed.”
He says a Canadian supplementary pension plan, which ratchets down investment risk as workers mature, would have “sensible defaults.” For example, workers would default into the plan rather than out, and there is gradual annuitization as the retirement target date approaches.