Canadians are not saving enough for their retirement so government is going to help them. At least that’s what junior Finance Minister Ted Menzies wants us to think. He’s criss-crossing the country to convince us that his Pooled Retirement Pension Plan [PRPP] will help Canadians save adequately for their retirement.
So better than nothing? As compared to not saving at all – which describes nearly a third of working Canadians – this is a real improvement. But not compared with the pensions that civil servants and many unionized workers and of course, MPs, will get.
An estimated two-thirds of working Canadians do not have a workplace pension and unless they have substantial savings, liquid assets or a trust fund, they will be retiring on a maximum Old Age Security of $6,404, CPP of $11,520 and maybe a bit of Guaranteed Income Supplement – at most around $22,000 per year for singles and $34,000 for couples in today’s dollars. For the low income, retirement can actually increase their cash flow; for everyone else that is likely to result in a significant reduction in living standards. Experts say that 25 – 30 percent of middle income earners face this risk. See page 12 in IRPP Study
So the solution is to get everyone saving and to start early in their career. Those who griped about having to set aside 10 percent or more of their earnings in those early years are a lot less stressed now as they contemplate retirement.
They also benefited from having their contributions professionally managed in very large funds that have economies of scale and access to investments only available to the big players. In the pension world, size matters.
But so does design. The technical jargon of pension plans would make your ears bleed but you need to know this much: in a “defined-benefit” plan, you know what annual benefit you will receive in retirement, in a “defined contribution” plan, it will depend on how well the market performs and where it’s at when you retire. Employers take the risk that their investments and actuarial calculations will not cover the defined benefits they have to pay. This risk falls on the employees in a defined contribution plan.
This difference is the reason why Air Canada and Canada Post workers went on strike – their employers wanted to close off their defined benefit pension plans to new hires.
So then, just how good an idea is the PRPP? It will be a voluntary, defined contribution plan run by private sector administrators – essentially the same people selling you mutual funds and handling your RRSPs. Employers don’t have to contribute – as they would with CPP or usual workplace pensions – so your funds won’t grow as quickly.
If enough people invest in them, the PRPPs will be very large – and remember, size matters but it’s voluntary so why would we? We have what is euphemistically called a “savings gap” because we just don’t save when left to our own devices.
Australia experimented with a nearly identical plan over a decade ago, and the results are not encouraging. There, they made it mandatory – with an opt out – and their Super Fund essentially requires the employers to enrol their workers in one of many defined contribution plans offered by the private sector.
A recent review of the system after 12 years experience, Australian Super Fund Review commissioned by the Australian government, shows that while people were saving in droves through mandatory contributions, investment returns were no better than inflation. The report fingered the high fees and costs despite the presumed role of competition.
So why would we copy them when we have other Canadian models that work perfectly well. And, they offer defined benefits!
Simply allow people to buy into a separate fund run by the existing not-for-profit pension funds like the CPP, OMERS, provincial Teachers Funds and the like. With their size and experience, they can offer low-cost, reliable defined benefit pensions. For more detail, please see Public Option Needed
So are the PRPPs better than doing nothing? Not if they keep us from looking at better options!
It’s not just our own money at stake. Already, tax deductible contributions mean that other taxpayers have to make up the lost tax revenue. If those savings are then eaten up by high fees or poor results because of bad design, then we will have wasted tax dollars as well as our own. So we owe it to all Canadians to get this right.