Ottawa on the hook for failing to address pension deficit: report

In place of expanding the CPP, Ottawa last month tabled legislation on a new savings device — pooled registered pension plans that allow small firms to offer their employees a voluntary vehicle to build up pension equity.

But Monica Townson, a pension expert with the think-tank, says the PRPPs don’t fit any of the requirements of a pension plan — they don’t guarantee benefits since they depend on market performance, don’t adjust for inflation and are completely voluntary, meaning employers don’t have to contribute and employees don’t have to participate.

“I don’t think it will do anything to address the problem,” she said.

“The estimate is that one-third of the baby boom generation will not have enough income for retirement, then they may be claiming guaranteed income supplement which comes out of government tax revenues.”

Expanding the CPP to double benefits over time will meet most of the criteria, the report says, adding Ottawa may need to consider speeding up the phase-in period for older Canadians.

Townson called the pooled pensions another savings vehicle similar to the individual registered retirement savings plans or the tax-free savings accounts, only less attractive since the PRPP contributions are locked-in and hence less flexible for contributors.

“We already have two savings schemes which people are not using, so why will the third one be more attractive than the others?”

When it was announced, the PRPP proposal was applauded by financial businesses that stand to gain from management fees to run the plans — but was called inadequate by New Democratic MPs and unions that also wanted CPP pumped up.

“Canadians are looking for options. Canadians are not looking for a hike in their CPP premiums,” Prime Minister Stephen Harper responded in the Commons.

The government found some sympathy from the Liberals in not wanting CPP contributions hiked at a time of high unemployment.

In an email response, Ted Menzies, the Minister of State for Finance, said increasing CPP contributions for employees and employers would hurt the economy and cost jobs.

“The PRPPs are the outcome of several years of co-operation, research and consultations by Canada’s provincial, territorial and federal finance ministers,” he added.

“Their design features will make them low cost, accessible and more attractive to small business.”

But Townson argued that the last time Ottawa expanded the CPP in the 1990s, contribution rates nearly doubled over a five-year period. During the corresponding period, the unemployment rate fell from 9.6% in 1996 to 7.6% in 2003.

That was at a time the economy was booming, however, whereas the economy at present is struggling to stay above water, with growth rates many expect will at best remain sluggish for a few more years.

The report stresses that Canada still faces a pension crisis, with the most in peril perhaps those in the 55-64 age group that are approaching retirement.

The situation has worsened in recent years because falling equity markets have diminished investment returns and Canadians are living longer, and fewer have company pension plans. In fact, from 1992 to 2009, the number of Canadians with pensions at their workplace has fallen from 45% to 39%, the report states.

Meanwhile, most Canadians have not adequately built up personal savings accounts to compensate. Only 31% of those eligible have established an RRSP plan and of those who have — among the 55-64 age group preparing to retire — the average saving has reached only $55,000. That will only offer about $250 a month in benefits.

Further weakening the system is that many employers are switching from defined benefit plans that attempt to guarantee a certain level of post-retirement income to defined contribution plans, which don’t provide a guaranteed level of retirement benefits.

Only about 4.5 million Canadians now have guaranteed benefits, most in the public sector. Many companies in the private sector have found the cost of guaranteeing benefits under defined benefit plans too expensive and, in some cases, have threatened the company’s survival.

“In a sense, this is the lost generation when it comes to retirement income,” the report states. “Almost certainly we can expect poverty rates among seniors to start going up again unless something is done.”