Pension woes: Middle class faces greatest risk

Will 2014 be the year the CPP gets fixed?

If you’re middle-aged and middle-class, you may be in trouble in retirement unless Canada’s pension woes get addressed, pension experts warn.

Those in the middle are the most likely to face a shortfall in their retirement savings, they say. While lower-income earners are fairly well covered by public retirement programs and higher-income Canadians can afford to sock away personal savings, it’s those in the middle who are greatest risk.

“Where the gap lies, with the CPP, is it covers people earning up to $50,000 a year. Over that, you’re on your own or your employer plan,” says Paul Forestell, senior partner at pension and benefits advisory firm Mercer Canada.

The problem is closing that gap.

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Will 2014 be the year Canada’s pension system gets a much needed makeover? A lot will depend on the pace of Canada’s economic recovery.

For Canadians who do have retirement savings, meanwhile, 2013 was a relatively good year.

Soaring stock-market returns and rising long-term interest rates boosted the value of their portfolios.

The average rate of return on employer-sponsored defined benefit plans in 2013 was 12.8 per cent, Mercer noted in a report released Thursday.

As a result, more of these plans returned to fully funded status, which means their assets were sufficient to cover their liabilities.

Almost 40 per cent of such pension plans are now fully funded, compared to just 6 per cent a year ago, Mercer reported. More significantly, only 6 per cent of such plans are now less than 80 per cent funded.

Still, these kinds of plans cover just one third of Canadians.

Defined contribution plans and registered retirement savings also performed better in 2013, the Mercer report noted.

“But there’s still a large number of Canadians who don’t have retirement savings period, or inadequate retirement saving,” Forestell cautioned

Canada’s pension plan failings have been on the top of the political agenda for four years. But the latest meeting of the country’s federal and provincial finance ministers, on Dec. 16, failed to produce any consensus on how to address the problem.

Business groups are balking at paying higher CPP premiums. Labour groups say enhancements to the CPP are the best option.

But federal finance minister Jim Flaherty has said he’s waiting for the economy to strengthen before tackling the topic.

Only a third of Canadians are covered by employer-sponsored defined benefit plans, the kind that guarantee a certain income level in retirement.

Only one in three Canadians is socking away any extra income in registered retirement savings plans, a tax deferred way to enhance personal retirement savings. And nearly half of those contributors are in the top 10 per cent of income earners, making $150,000 a year or more.

The Canada Pension Plan — which provides benefits for all working Canadians — is capped at a maximum benefit of just over $12,000 a year.

That means many average Canadians could find themselves facing a lower standard of living in retirement, pension experts warn.

Ottawa is pushing the provinces to adopt a relatively new concept — pooled pension retirement plans.

Much like RRSPs, pooled plans rely on individual Canadians’ savings. Employer contributions are voluntary. Pooled plans are seen as superior to individual RRSPs because contributors benefit from the economies of scale that come with pooling their money in professionally managed funds.

They’re particularly appealing to the self-employed and to small business owners.

A variety of business groups, from the Canadian and Ontario chambers of commerce to the Canadian Federation of Independent Business, favour pooled plans over increases to the CPP.

“We think the government’s position that now is not the time to increase payroll taxes when the economy is still not recovering at a rate that everyone would wish it were is the right position,” said the Susanna Cluff-Clyburne, director, parliamentary affairs, for the Canadian Chamber of Commerce.

But critics say pooled plans are no different from mutual funds, which come with relatively high management fees and aren’t as large or highly diversified as the CPP.

“I don’t think PPRPs will fix the problem,” Forestell says. Employer contributions are voluntary, which means the onus will likely fall on employees, he warns.

Canadians have only so much income available for savings, says Tom Klassen, a professor in York University’s School of Public Policy.

“If you ask people to save more on their own, that’s not easy. The average Canadian is worried about mortgage payments, or paying rent, or saving money for their children to go to college,” Klassen says.

In comparison, CPP contributions are mandatory, both for employees and employers.

Currently, the maximum CPP contribution is just under $5,000 a year, split 50-50 between employer and employee.

The benefits in retirement are capped at $12,516, based on a formula that replaces up to 25 per cent of the average Canadians’ earned income, pegged at $50,100 this year.

Advocates of CPP reform say it could be implemented in a variety of ways.

Higher-income earners could be required to contribute more. For example, the cost of increasing the premiums to cover Canadians earnings up to $75,000 would be roughly $2,500 a year, with only those higher income earners paying the increase, Forestell said.

Those higher-income earners could then reap roughly $18,000 a year in retirement benefits from the CPP, he said.

“It’s not quite that simple,” Forestell cautions.

Some have suggested doubling the qualifying income to $100,000. Others have suggested increasing the eligible amount of income covered by CPP benefits to 40 per cent from the current 25 per cent.

To soften the impact, advocates have suggested phasing the increases in over time, with some suggesting 20 years and others as much as 50.

Pension problems plague many modern industrial nations with aging populations.

But even by global standards, Canada’s pension system is failing all but the lowest income earners, a report for the Organization for Economic Co-operation and Development said in 2011.

Canada’s pension system ranked in the bottom 10 of comparable nations, the OECD report found.

Current retirees stand to benefit little from changes in the CPP. But that hasn’t prevented the Canadian Association of Retired Persons from having a strong opinion on the subject.

Many are worried their children will be worse off in future, said Susan Eng, vice-president of the advocacy organization.

Though she is optimistic the CPP will eventually be enhanced, she fears further delays will be costly.

“The right time to start was 20 years ago,” Eng says.

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