Finance Minister Jim Flaherty's out-of-the-blue proposal for a Pooled Registered Pension Plans initiative is doing little more, at least at the moment, than muddying an already complex issue.
On the big pension picture, there is widespread agreement. Thoughtful analysts from the left, right and centre generally agree that Canada, starting in the 1960s with CPP, did a pretty good job of providing for its older citizens. But most also acknowledge that a system, which worked well in times past, might not be so effective now or in future.
So the consensus is that some pension changes are needed.
The problem is not that there aren't any ideas on how to go about it, but that there are more than a half-dozen, and they diverge and overlap in different ways and to varying degrees. What Flaherty has done now is add one more to the mix, and he did so without providing enough detail to allow intelligent comparisons with other proposals already on the table.
The success of Canada's pension policy in the past should not be underestimated.
Just 35 years ago, before CPP started paying out retirement benefits to people who contributed during their working years, the number of older Canadians living in poverty was 35%. This rate had plummeted to 3% by the mid-1990s. Over that period of time the real income, net of inflation, for older couples increased 55%, and for older singles 79%.
But the good numbers on poverty have slipped of late, though to nowhere near the level where they started. The elder-poverty rate today is about 5%.
The financial comfort of older Canadians is by no means entirely dependent on government programs, of course. Indeed, according to an IRPP study by Ottawa consultant Bob Baldwin that, coincidentally, was released on Thursday, the same day as Flaherty's proposal, government payments alone would maintain living standards in retirement only for those who earned less than $23,600 a year during their working lives. The rest must either have other income sources or put up with cutbacks in their lifestyle in retirement.
So it's necessary to look at what has happened to savings and private pension plans as well public plans when assessing the best way forward.
A major factor has been the decline in workplace pension plans from coverage for about 46% of the labour force in the mid-1970s to 38% today. And when you look at the number that are defined benefit plans -- the only ones that can be counted on to deliver predictable returns, regardless of market fluctuations -- the decline is even steeper.
This reality -- plus the unmanageable costs and administrative hurdles that make it impractical, if not impossible, for small employers to provide pension plans for their workers -- has spurred several proposals for extended public coverage. Baldwin's paper outlines seven of them, four of which involve expanding the existing CPP. And now Flaherty has added an eighth.
The differences in the proposals are, for the most part, fairly nuanced -- though any policy analyst can tell you the devil is always in the details, and even small differences are worth thinking through carefully. They differ on whether the self-employed would be required to participate, for example, and they foresee costs to both employers and employees that range from unstated, to about 3%, to about 5%. And, as you might guess, the payout provisions also vary.
However, it is significant that, as Baldwin notes, they are all based on defined contributions (which means the eventual payout is based on investment performance) and not on defined benefits (which means you have a take-it-to-the-bank guarantee of a fixed cheque every month). And they all assume full pre-funding.
In other words, none of them are handouts that will benefit today's improvident worker who retires tomorrow after years of setting too little aside.
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