Imagining a world without pensions
TheStar.com – opinion/editorialopinion
Published On Sun Jul 03 2011. John Crocker
As provincial and federal governments wrestle with the issue of increasing pension coverage, an alarming trend has continued to emerge.
In recent years, responsibility for retirement savings has started to be off-loaded to employees. Traditional defined-benefit pension plans are disappearing from the private sector, and in their place we are seeing group RRSPs and other voluntary pension plans that depend mainly on employee contributions.
So let’s imagine what the world would look like if this trend were to continue.
According to Statistics Canada, the average Canadian puts about $2,500 into his or her RRSP each year, and has $60,000 in RRSP savings at retirement. This sounds like a lot, right?
Using the industry rule of thumb that $20 of savings translates into $1 of retirement income, that $60,000 provides a very modest annual retirement income of $3,000 per year — that’s $250 a month.
So our retiree would look to the Canada Pension Plan to provide the bulk of post-retirement income. In 2010, Service Canada says, the average Canadian was receiving $6,058 per year from the CPP — $504.83 per month. Not all of us contribute the maximum amount to the CPP each working year of our life, so we don’t all get the maximum.
Our retiree would also get Old Age Security benefits — $6,318 per year, or $526.50 per month in 2011. Together, RRSP, CPP and OAS would work out to $15,376 per year, or $1,281 per month — so our retiree would qualify for the Guaranteed Income Supplement, which could provide up to $665 more per month.
That brings our retiree up to more than $23,000 per year — a few thousand dollars more than the Statistics Canada poverty line of $18,000 for individuals living in large cities.
That’s a pretty bleak scenario for our older citizens. With the average wage in this country hovering around $50,000, the senior in our example would be making do on less than half of that. An Aviva study in Europe found that most workers there are expecting 70 per cent replacement income, but are likely to get as little as 35 per cent. So with less replacement income, a lower standard of living would almost certainly follow.
According to the AON/Hewitt 2011 Global Pension Risk survey, 39 per cent of Canadian plan sponsors have closed their defined-benefit plans to new entrants in recent years — and that figure is close to 80 per cent in Britain and the United States.
According to Statistics Canada, six out of 10 Canadians have no formal pension plan. If rates of defined-benefit coverage continue to decline, we’ll have no discernible pension coverage in the next 10 to 20 years, and will be grappling with widespread senior poverty.
We’ve already seen that Canadians aren’t saving for retirement on their own, given the $600 billion in unused RRSP room at the end of 2009, according to Statistics Canada.
A retirement income policy that assumes Canadians will take responsibility for their own welfare in retirement could result in disastrously low levels of senior income. We have to turn this argument around — rather than getting rid of pension plans, we need to strengthen and expand them. A pension plan that provides meaningful replacement income is our best line of defence against widespread senior poverty.
John Crocker is president and CEO of the Healthcare of Ontario Pension Plan.