Pension reform: Governments need to move

TheStar.com – Opinion/Editorial
Published On Sun Nov 14 2010

Canada’s finance ministers debated pension reform last Christmas in the depths of a Yukon winter, out of sight and out of mind. The meeting in Whitehorse was a wash, but continuing anxiety about pensions may have pushed the politicians to find common ground last summer in the more fertile soil of Prince Edward Island.

An unexpected consensus emerged to consider “modest phased-in” improvements to the Canada Pension Plan. It was a breakthrough after months of deadlock. As they prepare for a follow-up meeting next month in Kananaskis, Alta., the ministers need to build on that momentum.

There is still disagreement. The host province, Alberta, has condemned any increased CPP contributions as a job-killer. The federal Liberals are still leaning toward a “supplementary” CPP that workers could opt in to. The NDP and labour unions want to double the existing CPP payout and keep it mandatory.

Ottawa and conservative economists previously argued that the CPP was on a sturdy actuarial footing; that Canada could boast of low poverty rates for seniors; and that Canadians could rely on their RRSPs for extra cash in later years. That’s only half the story, though. Canada’s impressively low poverty rates are due to the Old Age Supplement and the Guaranteed Income Supplement. One reason the CPP is on such a solid financial footing is that its payouts are among the lowest in the world, averaging a mere $6,000 a year and capped at $11,000 annually, which is not good enough.

It’s the middle class who should be most concerned about their future retirement income. Pensions promising a fixed payout (defined benefit plans) are rarely on offer for new hires in the private sector, and longtime employees worry that their old plans are at risk if their company goes bankrupt. RRSPs have long been a disappointment: the take-up rate remains low.

That’s why, to borrow an investment maxim, past returns are no indication of Canada’s future performance when it comes to retirement income. What worked for many in the past — robust private pensions and rising markets — can’t be counted on in future. All the more reason to buttress the CPP as the main pillar of Canada’s pension system.

The CPP has been a success story, with untapped potential to deliver even more for Canadians if properly funded. Recent studies have shown the lower management fees and greater diversification of the CPP Investment Board outdo the alternatives.

But the devil of pension reform is in the details. Politicians, preferring talk to action, are reflexively reluctant to lead on pension issues. Public consultations have dragged on for years. Ontario is the latest to release a discussion paper, which calls for a “modest expansion of benefits.” A year after the finance ministers went off course in Whitehorse, they need to make up for lost time when they meet again in Kananaskis and start answering the multi-billion-dollar question of what they mean by “modest.”

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