CPP a better bet than private plans
TheStar.com – opinion/editorialopinion
Published On Mon Feb 28 2011. Ken Georgetti
Fewer and fewer workers are covered by employer pension plans, and individual RRSPs have failed to fill the gap. Left completely on their own, people have saved too little for retirement and far too much of what they do manage to save is swallowed up by the outrageous management fees charged by investment advisers and financial institutions.
If we fail to act, inadequate pensions will cost governments (us as taxpayers) a lot more down the road for income-tested support vehicles like the old age security program’s guaranteed income supplement (GIS). In fact, if we don’t do something the cost of providing GIS to beneficiaries will rise from $9.2 billion in 2011 to $22.2 billion in 2030. That will represent a huge burden on the public purse.
At their December meeting in Kananaskis, seven provinces pushed to expand the CPP so it would replace a higher proportion of previous earnings. The Canadian Labour Congress proposes replacing 50 per cent instead of the current 25 per cent of earnings, to be funded by a modest, phased-in increase in CPP contributions paid for equally by workers and their employers.
But federal Finance Minister Jim Flaherty changed his mind and Ted Morton of Alberta pushed for an alternative of pooled registered pension plans (PRPPs) to be run by financial institutions. Flaherty and Morton prefer an idea that will shovel more business to a financial industry that charges the highest management fees in the world.
The expansion of the CPP, one of the most effective and efficient public retirement programs anywhere, was sidelined by these politicians who are charged with looking after the public interest. It is noteworthy that the CPP is also actuarially sound for the next 75 years, which is as far as actuaries will look forward.
Unlike the CPP (where employers pay half the premium cost), PRPPs will not require contributions from employers. Some may contribute, but most will not. With these plans, workers have to save at least twice as much over their working life to get the same benefit as they would from an expanded CPP.
The CPP currently pays out a benefit that is a set 25 per cent of pensionable earnings. Workers can count on that defined retirement benefit being paid to them for life (there is a survivor benefit and small death benefit as well). CPP retirement benefits are also fully indexed to inflation and are portable no matter where you work. By contrast, workers simply will not know in advance what kind of retirement benefit they will get from an RRSP or a pooled plan.
To get a defined benefit for life from an RRSP or PRPP, indexed to inflation, people must purchase an annuity when they retire. But annuities are very costly. To buy an indexed life annuity in Canada that would pay the equivalent of the maximum CPP benefit today would cost a person about $250,000, far more than most people set aside in RRSPs. Women would have to save even more on their own because insurance companies charge them significantly more for annuities than men, whereas the CPP provides the same benefit to both men and women.
Pooled retirement plans may — or may not — provide decent investment returns. But they will not generate the same solid, secure returns as the Canada Pension Plan Investment Board. PRPPs will be much smaller than the CPP, which covers every working Canadian, and therefore cost more to administer.
The CPP Investment Board has investment management expenses of just under one-half of 1 per cent. This compares with a typical management expense of 2.7 percentage points charged by a private equity mutual fund, which will eat up more than 50 per cent of your lifetime contributions.
It is beyond belief that finance ministers armed with incontrovertible research and overwhelming public opinion would opt for a pig-in-a-poke program like the PRPP. It shows the kind of power and influence that business, especially the financial industry, has over politicians and government in this country.
You can help by speaking out on your and your children’s behalf to federal and provincial representatives.
Ken Georgetti is president of the 3.2-million-member Canadian Labour Congress.
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