The right kind of pension reform  – opinion/full comment/editorial
Wednesday, Dec. 22, 2010.

Pension reform is topping the headlines — and the agendas of federal political parties.

The Liberals recently produced a white paper on the subject, contemplating a voluntary supplemental pension plan, and an easing of rules that currently limit retroactive payments for late claimants of the Canada Pension Plan (CPP). The Conservatives, meanwhile, have secured provincial buy-in to the concept of Pooled Registered Pension Plans (PRPPs), targetting the two out of three Canadian private-sector workers who currently do not benefit from an employer-sponsored pension plan.

According to federal Finance Minister Jim Flaherty: “This new private-sector retirement savings vehicle will improve the range of retirement savings options available to Canadians by providing a low-cost retirement savings opportunity for employees–with or without a participating employer — and the self-employed. PRPPs will be a major breakthrough for the Canadian pension market.”

Criticism of the measure was swift, even anticipatory, in the form of an occupation of the Finance Minister’s Whitby, Ont., office by organized labour activists — including Ontario Federation of Labour president Sid Ryan — on Dec. 17. According to Mr. Ryan: “What Flaherty is proposing is a glorified savings plan — a gimmick to get the issue of pensions off the front pages … It will not deliver income security for Canadians the way an expansion of the CPP will.”

After Mr. Flaherty’s announcement, federal opposition parties added their voices. Liberal Finance Critic Ralph Goodale dismissed the plan as “just too small and too timid,” while NDP leader Jack Layton complained that “only the people who have a lot of money to save are going to benefit from this and they get the tax break that goes along with it.”

The Liberals’ previous fix for Canadians’ retirement was to bail out the CPP by hiking contributions from 6% of pensionable earnings in 1997 to 9.9% by 2003. Increasing CPP contributions in this manner is the stick, forcing Canadians to save, but via the heavy hand of the state. Providing investment vehicles to incentivize savings, such as the Tax Free Savings Account and the new PRPP, is the carrot. Like us, the Tories appear to prefer the carrot-based approach, which respects the ethos of personal responsibility and choice.

Mandating higher CPP contribution requirements from employees would limit their choice in how to save, by reducing the amount of money left over to contribute to other investments. Mandating higher contributions by employers could lead them to trim other benefits, including pensions, or crimp job creation by making it more expensive to hire new workers. In a time of economic uncertainty, the government was wise not to go down that road. (There are also benefits to PRPPs, such as lower fees than retail RRSPs, which could offer greater savings to participants.)

There are still many details to be worked out, which Mr. Flaherty has put off until the next finance ministers’ meeting, scheduled for June 2011. But at least the wheels of reform have been set in motion. As Baby Boomers start turning 65 next year, and with average personal debt levels at a record 148% of personal income, many Canadians risk spending their golden years in less-than-gilded surroundings.

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