This article was published by the Financial Post on December 6th 2011. To see this story and to read related stories on the Financial Post website, please click here
by: Johnathan Chevreau
Canada’s finance ministers bungled pension reform when they chose the new Pooled Registered Pension Plans over expanding the CPP, says veteran pension observer and social policy consultant Monica Townson in a report for the Canadian Centre for Policy Alternatives.
The 30-page report, being released Wednesday, dismisses the PRPP was a “scheme…run by insurance companies and other financial institutions.” They will “charge fees for doing so. Employers will not have to contribute to the plan. And workers’ savings will be locked in — but apparently they will be allowed to opt out if they want to.”
Worse, Townson writes, the program will not guarantee a set pension, since it’s Defined Contribution in nature and so will fluctuate with financial markets:
It is yet another voluntary savings scheme that will do nothing to address the pension crisis. Since very few people take advantage of existing voluntary retirement schemes, it is not clear why officials are claiming the proposed PRPPs will prove more attractive than the existing programs.
Baby boomers “lost generation” for pension reform
Townson also points out that the baby boom generation now on the cusp of retirement will scarcely benefit from PRPPs. “This is the lost generation as far as pension reform is concerned.” About a third of Canadians aged 45 to 64 are likely to have incomes that “fall short of adequate minimum incomes,” she writes. And the typical person aged 55 to 64 has saved only $55,000 in an RRSP, enough to generate just $250/month.
Townson and the CCPA plump instead for the “Big CPP” favored by the Canadian Labour Congress, the NDP and the Liberal party. She concedes a “relatively modest” increase in contribution rates would be required to expand the CPP but this could be phased in gradually.
Among the benefits: inflation indexing and full portability for those who change jobs frequently. Another benefit, albeit one that also applies to the PRPP, is that future federal expenditures on the Guaranteed Income Supplement (GIS) would be reduced.
Townson enlists the aid of economist Michael Wolfson to make the case that we can’t blame “inadequate savings discipline” for the $600 billion in unused RRSP contribution room. He blames instead unduly poor returns offered in markets for private savings and annuities; a system of regulating workplace pensions that discourages employers from offering such plans in the first place; and retirement savings tax incentives “tilted toward the wealthy.”
And of course there’s the well-documented shift in employer pensions from Defined Benefit to Defined Contribution plans. These “let employers off the hook because they no longer have to guarantee promised pension benefits.” Only 4.5 million Canadian workers now have a DB plan: just 26% of all workers.
When federal and provincial finance ministers met in Alberta in December 2010, expectations were high that the CPP would be expanded, perhaps to the extent of ultimately doubling benefits, as championed by the Canadian Labour Congress.
But the insurance company lobby for a PRPP prevailed while the finance ministers agreed they would continue to work on a “modest expansion” of the CPP. Townson notes that Quebec had objected to an expanded CPP and that Alberta appeared to be “a key hold-out.”
The report then dissects the PRPP, which it says was developed and promoted by the Canadian Life and Health Insurance Association and the “corporate-funded” C.D. Howe Institute, among others.
Like other DC plans, contributions to PRPPs will be made as a percentage of an employee’s salary, to be invested by the financial institution “which will, of course, charge fees to run the program.” Rules may vary by province.
The report assails the PRPP for not being mandatory but concludes this is unlikely in any event because “employers will likely resist such a move.” Townson says the PRPP is not really a “pension plan” but rather “a savings scheme.” Workers already have RRSPs and TFSAs, which behave similarly.
Barriers to a Big CPP
While CPP covers almost all Canadian workers, benefits were originally set at a modest level in the expectation workers would supplement its benefits with workplace pensions and their own savings in RRSPs. Townson notes that even in 1966 when the CPP was created, the insurance industry mounted strong opposition to larger CPP benefits. She says Canada relies more on employer pensions and private savings than other countries do.
Even with an expanded CPP, OAS and GIS would still be necessary. Townson mentions the Liberal party’s suggestion of a supplementary account to the CPP but because it would be voluntary warns it likely wouldn’t work if the objective is to achieve universal coverage. The NDP also prefers a voluntary route, she says.
Apart from the perception of being another “nanny state” initiative, the Big CPP also suffers from the argument contributions constitute higher “payroll taxes” during a time of a fragile economy. Another barrier has been the view that a Big CPP would force lower-paid workers to save more than they need.
Townson leaves little doubt about which option for pension reform she and the CCPA favors. Personally, I don’t see why the PRPP can’t coexist with a modestly expanded CPP (however you define the word “modest”). Add in RRSPs, TFSAs, OAS, GIS and non-registered savings — not to mention traditional employer pensions for those fortunate enough to have one — and I think all the necessary pieces of the pension puzzle are already in place.
All that remains is for the federal and provincial governments to decide how to assemble them, and which pieces will be voluntary versus mandatory.
Harry Koza on “Doin’ the PRPP Walk”
P.S. Harry Koza has an interesting piece on PRPPs in the AIMS Commentary (AIMS is the Atlantic Institute for Market Studies). In “Doin’ the PRPP Walk,” he says the PRPP is a “timid step to be sure” but is “at least a step in the right direction.” He criticizes the Bank of Canada for maintaining a low interest rate policy that penalizes the prudent: those who live within their means, minimize debt and save for their own retirement. Such policies are making the pension problem worse than it might otherwise be. He has some sensible suggestions for bolder reform, including permitting transfers from RRSPs to TFSAs and increasing the allowable annual contributions to TFSAs — after all, this is money Canadians have already paid income tax on.