Whither [or is it “wither”?] Pension Reform?

Longevity is a good thing unless we outlive our money. So Canada’s social safety net becomes ever more important as we age and see so many more years ahead of us. Yet public policy makers are quick to blame our increased longevity for upward pressures on public spending – whether health care or pensions – and threaten to cut those very programs that we will need in the long haul.

Not everyone of course. Hale and hardy well into their 70’s, many more Canadians are working longer, willingly. For them, the modest income support of the Old Age Security is more of a nuisance at tax time when most of it is clawed back anyway. They have options and choose to work or to golf.

The vast majority however, live a modest lifestyle in which doing without the $500 a month OAS cheque would upend their tightly budgeted retirement plans. And many of them have some workplace pension which have become increasingly rare. So they worry about their children and grandchildren – which is why so many CARP members support the creation of a supplementary pension plan to help them save for their own retirement.

But this is a group that knows that details matter – they’ve seen savings eroded by high fees and bad decisions. So they want fee caps and protection from inappropriate risk taking – and frankly from having to make investment decisions themselves. They care about the low wage earner and want to make sure that someone – government or the employers – will help them put enough aside.

Added up, that looks pretty much like the CPP. And on that score, the government’s proposed PRPPs do not fit the bill. They are not universal but depend on employers voluntarily signing up. Once signed up, employees cannot move their funds to another fund manager, – they can only opt out. Employers are not required to contribute and have no responsibility for how well the funds perform. All the market risk is borne by the employees. And oh yes, the funds are locked in.

A CPP enhancement was mentioned in June 2010 and by December 2010, it was off the table and today remains a fond memory. If the PRPPs were combined with the CPP-enhancement, there might have been a decent balance of universality, predictability and choice.  Alone, the PRPPs are little better than group RRSPs and given that employers were not flocking to them before, it unclear how many more would take up the new offering.

Canadians are not using the available RRSP room now to save for their own retirement. They now contribute about $34 billion to RRSPs, which is only 5.1% of the total room available to eligible tax-filers leaving $630 billion dollars of RRSP contribution room untouched. It is mostly the higher income earners who fully use their RRSP deductions. It is the middle income earners who need to save more and are not making adequate use of the existing tax deferral vehicles to do so.

Ironically, the PRPP framework is depending on this lack of initiative to keep enough people enrolled in the plan that the employer has chosen. Once the employer has chosen to enrol all its employees in a PRPP, the employees must opt out within 60 days. The “benefit” of auto-enrolment is that most people stay enrolled either because they want to or because they neglect to opt-out. This would be fine if this were a true pension plan but not if the forced savings would not earn them enough for an adequate retirement.

Rather than keep people enrolled because they failed to opt out, the plan designers should have considered what would make people choose to join – levering employer contributions is a big carrot and so would a predictable pension promise – neither is on offer in the PRPPs.

A final word about that elusive CPP-enhancement. The federal government seems to have been swayed by those braying that forcing employers to match any increased CPP premiums would kill jobs – thousands would fall! Yet, for a “modest” 10% percent increase in the ultimate CPP pension benefit, employers and employees would each pay a maximum $45 more per month and for a low income earner, each would pay $18 more per month – hardly a job killer.

Luckily, it appears that the provinces are coming around, one by one, to the realization that a modest CPP-enhancement is warranted. Last time, the federal government was able to point to a reluctant Alberta that vetoed the idea. Things might have changed with the new leadership. So no more excuses.

And if our governments put in place a proper supplementary pension regime that will help working Canadians save adequately for their own retirement, they could then reduce their spending on public pensions like the OAS and GIS because we won’t be needing them.

Read about CARP’s February 28th 2012 Presentation on PRPPs (for the Federal Parliamentary Standing Committee on Finance): CARP’s Parliament Hill Presentation on PRPPs

Get CARP’s full PRPP submission to the Finance Committee: A Proposed Framework for Pooled Registered Pension Plans

Get the Transcript of the Committee Hearing: Full Hansards from February 28th 2012 session on PRPPs