By BRIAN LEE CROWLEY
Macdonald-Laurier Institute
Troy Media commentator
Finance Minister Jim Flaherty recently announced that the proposal to expand the current Canada Pension Plan (CPP) with higher premiums and higher benefit levels has been shelved in favour of working with the private sector to improve Canadians’ retirement options. We should all heave a sigh of relief.
Some legitimate concern has been expressed that the recent recession has devastated some people’s retirement savings. But it is hardly the first time economic downturns have resulted in disappointing retirement expectations for some. So the question to be asked is whether the recession has revealed that the way we run pensions in Canada is unsound, or has simply caused some stress, as it has in so many other areas.
Nothing wrong with the CPP
It turns out there is nothing really wrong with the way we run pensions in Canada and, in fact, much that is right. The pension systems of only two major OECD countries, France and Germany, give their average retiree a higher percentage of average pre-retirement disposable income than Canada. The Netherlands, Sweden and even the U.S., allegedly more generous, actually give their retirees less income, relative to average population disposable income.
Furthermore, it is by no means clear whether Canadians will lack sufficient retirement income to live independently and with dignity. Poverty among Canadian seniors is among the lowest in the OECD, which is a sure sign that our retirement system is not failing the least well off. And the wealthy, of course, are generally retiring comfortably. So if there’s a problem, it lies in the middle.
There is evidence that some people in the middle income range are not saving enough to generate the 60 to 70 per cent of pre-retirement income generally considered suitable for a comfortable post-work life. Unfortunately, we don’t know a great deal about why this is.
For example, the shortfall for a minority in the middle may be due to poor data, that is, all possible sources of retirement income are not being captured. And the fact is some middle- and high-income Canadians may actually need less than 60 per cent of their pre-retirement income for an adequate lifestyle; the OECD even suggests 50 per cent replacement is sufficient for those who earned over $90,000 in Canada. Given these uncertainties, and our incomplete knowledge of how the recovery will proceed, it is too early to make major policy changes with uncertain long-term effects.
Those who have suggested that Canadian need to be forced to save more have failed to make their case. If more forced saving were the solution, you’d expect Canadians who participate in registered pension plans to have higher retirement incomes than those who do not. They do not.
So before we decide governments have to do anything drastic, we should wait and see whether Canadians react rationally to the discovery that returns on retirement savings are lower than they had hoped by changing their behaviour, increasing their savings and/or reducing their expenses.
Canadians already have an impressive array of methods to help save for retirement, including RRSPs, which are actually quite widely used in Canada, when age and income are taken into account; the removal of the foreign property rule, which allows Canadians to diversify their investments and hence their risk; and the tax-free saving account, which has added an important new saving vehicle whose impact we cannot yet begin to measure.
Still some work to be done
There is still work to be done, of course, but calmly and incrementally, to improve “risk pooling” in the existing pension system. Retirement plans are intended to protect people against the risk of catastrophically inadequate post-work income, and rightly so. The way they do this is to combine individual people’s retirement savings into a large pool and invest it in diverse ways. The virtue of this approach is that even if some specific investments turn out badly, the general rate of return is high enough to furnish everyone with a decent standard of retirement living. The danger is that the risk can be pooled in ways that undermine personal, corporate and government responsibility and accountability.
It is possible there is a minority that is not being well-served by this otherwise robust system, but we don’t even know yet if that is the case. Let’s find out before making half-based reforms to a system that has served Canadians well.