Flaherty right to worry about burden on young workers [pensions]

TheStar.com – Business
Published On Mon May 10 2010.   James Daw

Jim Flaherty has stated the first principle for any national initiative to help Canadians increase their retirement income should be: Do no harm.

Harm could mean different things to voters of different ages and incomes, to sellers of mutual funds and annuities and to folks with and without pension plans.

So we asked for an explanation from the 60-year-old federal finance minister from Whitby, who has been in a pension plan for only four years. (Earlier in life he helped shut down the pension plan for representatives to the Ontario legislature, and worked as a lawyer before that.)

“Some of the proposals … sound good on paper but what they would involve, for example, (is) a major generational shift of risk,” he said during a brief session with reporters last week.

“We would have younger workers paying a lot more for benefits that they would not see for 35 and 40 years but others would see them sooner.

“I think we have to be conscious that we don’t put a burden onto (young workers) that benefits those of us who are older. That’s important.

“I want (younger workers) to have confidence in the system. I also want the system to be there for them when they’re older.

Flaherty’s concern about further burdening young workers is fully justified. It is mainly from their pockets that the baby boomers like him will receive up to $19,776 a year worth of government pensions from age 65 ($34,218 for couples), according to research by Keith Ambachtsheer, director of the Rotman International Centre for Pension Management.

The maximum figure for the single senior with no other savings (about $3,000 more than the average single senior) is paid from government pension plans for which next to nothing has been set aside in advance.

At the moment the reserve fund of the Canada Pension Plan amounts to roughly $7,000 per pensioner and worker. There is nothing held in reserve to pay Old Age Security or Guaranteed Income Supplement.

So the younger generation will hand to the older generation the equivalent of a one-time transfer of nearly $300,000, which is about how much money a person would need to guarantee $20,000 of inflation-protected income from age 65 by buying a life annuity.

While those younger workers are paying for seniors’ pensions, many seniors will be counting on them to pay top dollar for their homes, pay their medical expenses, and pay higher taxes on the same amount of annual income.

Those younger workers might also wish to raise children, and save something extra for their own retirement because government pensions do not afford much of a lifestyle.

As modest as government pensions may seem today, they will see even less impressive 40 years from now. Old Age Security now only rises with consumer prices, not with wages the way CPP benefits do up to the point of first pension payment.

A self-employed person earning $47,200 a year will contribute $4,326.30 this year to CPP, minus about 20 per cent after a tax credit.

To also save the equivalent of $300,000 in today’s dollars, he or she would have to set aside an extra $4,844 a year between ages 30 and 65.

That assumes the self-employed worker could earn an average investment return 3 percentage points higher than annual increase in consumer prices.

The worker save in a registered retirement savings plan and get a 31 per cent tax refund, or contribute that much less to a tax-free savings account.

But, as one economist pointed out at a pension conference last week, having too many contribute to the TFSA could raise claims for the Guaranteed Income Supplement.

If the economist was right, future generations could be harmed by the increased cost of GIS payments if workers are not offered a new pension plan to boost their income in retirement.

jdaw@thestar.ca

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