Given the state of retirement savings in Canada, average workers are facing a large drop in their standard of living once they leave the workforce — and the reforms on the table aren’t likely to do much to address the problem.

When the federal and provincial finance ministers meet in June, one of the primary topics under discussion is expected to be reform of the retirement income system. In particular, the idea of expanding the Canada Pension Plan is likely to be up for debate once again.

Last year, the ministers discussed both expanding the CPP and introducing new private pension vehicles (a.k.a. pooled registered pension plans). Ultimately, the ministers decided to implement the PRPP but put off a decision on CPP expansion.

During the recent federal election campaign, the retirement savings system was an issue, with the Conservatives promising to beef up private savings options (through the introduction of PRPPs and a future increase in the contribution limits for tax-free savings accounts), while the Liberals and the New Democrats called for expansion of the CPP.

All three parties favour an increase to the guaranteed income supplement (which supports the poorest retirees); and the Tories, in their latest budget, had promised to beef up the GIS by about $300 million a year. Although this measure surely is welcome, it doesn’t address the most pressing problem facing the retirement income system — the income shortfall facing the middle class.

Low-income workers are fairly well covered by the current system. According to Jean-Claude Ménard, chief actuary at the Office of the Superintendent of Financial Insti-tutions in Ottawa, lower-income workers can expect to see public pensions replace almost 90% of their pre-retirement income, which is higher than the Organization for Economic Co-operation and Development average of 82%.

It’s the average workers that are facing a tougher retirement. In Canada, workers earning the average wage can expect to see only 57.3% of that wage replaced by public pensions, vs almost 70% for the OECD overall. And people earning 1.5 times the average wage can expect to see only about 40% of their income replaced by public pensions — well below the OECD average of 63.4%. (When private savings are factored in, those rates rise to 90% for average workers and 76.5% for above-average earners, according to OECD calculations.)

The obvious conclusion is that while the retirement income system seems to do a relatively good job of providing for its poorest workers, it does much less for the middle class. Indeed, a new study from the Montreal-based Institute for Research on Public Policy found that average Canadian workers are facing a substantial drop in their living standards in retirement.@page_break@The study, which examined the data in more detail than just looking at average measures of income and replacement (using new models developed by Statistics Canada), projects that about half of Canadian workers born between 1945 and 1970, with average annual earnings of between $35,000 and $80,000, are likely to experience at least a 25% drop in their living standards when they retire.

And, the proportion of those facing replacement rates of less than 75% is expected to increase for the younger generations in that age range. The IRPP report cites several reasons for this, including: people are staying in school longer and, therefore, have shorter working lives; and workplace pension coverage continues to recede.

So far, private savings schemes have failed to fill the gap, and the IRPP report says that reforms to voluntary savings arrangements “will not have more impact than mandatory measures in achieving adequate retirement incomes.”

The IRPP studied a couple of options for enhancing the public system in its research: a gradual doubling of CPP coverage to 50% of career average earnings, up to a maximum of about $47,000, from 25%: and a more modest increase to 40% of average earnings. However, the IRPP report suggests that even these measures, which are probably at the outer boundary of what is being considered by policy-makers, wouldn’t make much difference.

“Perhaps the most striking feature of these results is just how modest the impacts are of these quite substantial reforms of Canada’s public pension system,” the IRPP report says. A move to increase CPP coverage sharply, the study found, would increase average replacement rates by only four to eight percentage points for the generations that are currently facing such a large shortfall.

The primary problem, the IRPP report notes, is the gradual phase-in that such reforms would require if they are to be fully pre-funded. It would take 40 years to implement such reforms fully, which is just too late for most middle-aged, middle-class workers, states the report: “The reforms under discussion are unlikely to ameliorate the situation to any substantial degree over the next two decades.”

Instead, much more ambitious reforms must be considered if policy-makers aim to deal with the retirement income adequacy issue facing current workers, the report adds. For example, do reforms need to be gradually phased in, as is commonly assumed?

In addition, the IRPP report suggests phasing in retirement more gradually, noting that many workers are likely to prefer a more measured transition out of paid work. Indeed, the report adds, the basic concept of retirement needs to be rethought: “Such questioning could open up a more innovative range of policy options for improving Canada’s retirement income system.” IE