New hires at RBC, along with increasing numbers of private sector employees, receive a different type of pension plan. It’s called a defined contribution pension, or DC plan. The employer may put money in, sometimes quite a lot of money, but as for what comes out at the other end, that’s unknown, and unknowable. The health of the plan is not the employer’s responsibility. Which is why, according to Moshe Milevsky, a finance professor at the Schulich School of Business, DC plans are not pensions. In a recent paper, he describes them as nothing more than “tax-sheltered investment plans with zero guarantees.” A DC plan is really just another RRSP. The individual bears all the risks. And returns, instead of being guaranteed, are guaranteed to fluctuate—wildly.
The shift from pensions to not-quite pensions—or no pensions at all—is happening all across corporate Canada. Only 39 per cent of employees have a workplace pension plan, according to Statistics Canada. And that figure, dismal as it is, paints too rosy a picture. It includes DC pensions. It includes government workers, most of whom have a pension, and a DB one at that. In the private sector, only one in seven workers has a DB pension plan. One worker in nine is in a DC or other plan. The remaining 75 per cent of us? No pension coverage at all.
If your entire knowledge of economics and finance theory is “free markets good, big government bad,” the above might rank as progress. Savings are being liberated from the dead hand of bureaucracy! But it turns out that a free market in retirement savings is nothing like a free market in, say, groceries. Most people aren’t going to forget to eat lunch. But what about planning for an event, like retirement, that may happen 20, 30 or 50 years hence? A growing literature in behavioural economics shows how the rational person is anything but when it comes to planning for a distant, uncertain future. Which may explain why Canadians on the edge of retirement, aged 55 to 64, have an average of just $55,000 in their RRSP. That’s enough to pay out maybe $300 a month. Pre-tax.
My own experience sadly confirms the short-termism of Homo Canadensis. Way back when, starting my first job, I had the option of taking part in my new employer’s defined benefit pension plan. I didn’t. Why not? Because like most 20-somethings, I wasn’t too concerned about saving for retirement. After two years, my collective agreement forced me to join—subjecting me to forced biweekly deductions, about which I constantly complained. A few years later, I moved to a job with no pension plan. No more deductions! I felt richer. But I was really just spending in the present by borrowing from my future.
