Social Policy in Ontario

It’s “high noon for pension reform” and time to move from debates to decisions, pension consultant Keith Ambachtsheer says in a widely circulated new report. The president of KPA Advisory Services Ltd. is pushing for a supplement to the Canada Pension Plan that would benefit the 75% of Canadians who don’t have employer pensions. His focus on improving prospects for middle-income Canadians earning $30,000 to $100,000 makes it one of the leading contenders for reform.

“One of these ideas will gain currency in the next six weeks,” Ambachtsheer said in an interview, “because the next [finance] ministers meeting is at the end of May.”

While Canada’s retirement income system is among the top three or four in the world, he’d like to vault the country to the “top of the pension podium.”

Even so, the ongoing pension debate was still very much in the talking stages at hearings in Ottawa this week.

“I don’t think we have a crisis,” says Mercer senior partner Malcolm Hamilton, who provided input to a Standing Committee on Banking, Trade and Commerce examining savings patterns in RRSPs and TFSAs.

Current retirees are “pretty satisfied,” Hamilton says, and “it doesn’t look like there will be a problem for Baby Boomers” approaching retirement.

Bill Kyle, group retirement vice-president for Great-West Life Assurance Co., also argues the Canadian pension system is “not broken.” Half of us have retirement plans at work, if you count Capital Accumulation Plans (CAPs). Those include group RRSPs, defined-contribution plans, deferred profit-sharing plans and group TFSAs.

But such plans are not pensions in the classic sense, says finance professor Moshe Milevsky. A true pension involves a binding contract and a guarantee or pledge that retirees will receive a predictable, reliable income stream for life.

Defined that way, two-thirds of workers lack true employer pensions. The lucky third are government workers and the few in the private sector who enjoy old-fashioned, guaranteed income defined-benefit pension plans.

That said, almost all Canadians will enjoy at least a partial “true” pension in the form of the three government programs: CPP, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

Workers accustomed to living on meagre incomes may find that triad enough. Tina Di Vito, BMO’s director of retirement strategies, says an unmarried 65-year-old gets a maximum of $17,413 a year from the three plans and couples get $34,800 – inflation-indexed and tax-free on the GIS portion.

Not bad for those who never saved a dime.

But few get the maximum. Ambachtsheer says the average is $16,760 for a single senior or $28,202 for couples. Only 38% of Canada’s 4.2 million seniors receive the GIS – it’s not available to those with significant other sources of retirement income.

Few worry about people earning more than $125,000 a year, so it’s middle-income workers without defined-benefit pensions that Ambachtsheer and other reformers are targeting.

In Canada’s workforce of 17.8 million, 7.8 million make between $30,000 and $125,000, but about half of those have employer pensions. The 3.5 million who don’t are mainly the self-employed and those working in small- or medium-sized businesses. Few of those firms are likely to sponsor classic pensions and many large companies would rather not offer them either, Hamilton says.

That’s why the Canadian Labour Congress is keen on expanding the one defined-benefit plan all workers already have – CPP. The labour group thinks the plan should replace 50% of working incomes rather than the 25% it was designed for. To do so, it suggests raising combined worker/employer contributions to 15.6% from the current 9.9% of the first $47,200 of annual worker earnings.

Ambachtsheer prefers a middle way: Applying the 9.9% to a larger base of $94,900, thereby helping middle-income earners. His Canada Supplementary Pension Plan, or CSPP, would be a personal pension account like a group RRSP, but flexible enough to spin out annuity-like income in retirement. Unlike the existing CPP, however, participants could also choose to pass to their heirs some accumulated capital.

For its part, CARP, Canada’s association for the 50-plus, proposes a supplementary universal pension plan with payroll deductions and professional management. It would not be a plan subject to market vagaries, but “a target benefit plan like the CPP, but not necessarily part of the CPP,” says vice-president of advocacy Susan Eng.” Participation would be mandatory.

Hamilton favours a “modest expansion” to CPP to compensate for the gradual decline of corporate defined-benefit plans. In order not to burden future generations, he thinks it should be fully funded – all liabilities covered in advance by contributions and investment growth – with benefit increases phased in over 40 years. Such an expanded CPP could be supplemented by a voluntary DC plan like the CSPP or similar proposals.

Less revolutionary is the C.D. Howe Institute’s suggestion to tweak RRSP rules to bring them up to levels politicians and civil servants enjoy. Using the benchmark of federal public service pensions, RRSP limits would rise to 34% of earned income from 18%, with maximum contributions rising to $34,000 from $22,000.

“It makes sense to narrow this gap,” Hamilton says, pointing to the discrepancy between Ottawa saying it can afford to give itself rich pensions but its unwillingness to let ordinary Canadians save nearly as much in RRSPs.

In Ottawa this week, BMO’s Tina Di Vito, director of retirement strategies, and Deloitte managing partner Andrew Dunn both suggested Canadians could save more in RRSPs if dividends and capital gains were allowed to retain their favourable tax treatment when withdrawn from the plans. Also, minimum RRIF withdrawals designed when interest rates were higher should be lowered so as to minimize the chance of running out of money in advanced old age.

Financial Post

jchevreau@nationalpost.com

z An excerpt of Keith Ambachtsheer’s proposal can be found at wealthyboomer.ca

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