The warning that “Canadians are not saving enough for retirement” has been repeated enough times that many people unquestioningly accept widespread inadequate retirement savings as a fact.
Fortunately, this claim — along with the myths that income inequality is growing or manufacturing is disappearing — is false. But let’s take a moment to look at the cold, hard numbers to see why that’s the case in the pension field.
First, there is nothing wrong with the way pensions are run in Canada, and much that is right. Only two major OECD countries, France and Germany, have pension systems that give their average retiree a higher percentage of average pre-retirement disposable income. The Netherlands, Sweden and even the U.S., with their much more generous state schemes, end up giving retirees less income, relative to average disposable income, than Canada’s impressive 91 per cent. This is not a failing system.
Canadians held $2.4 trillion in various pension plans in 2011. The value of these plans did tumble 12 per cent (or $200 billion) during the 2008 financial meltdown, but their value has more than recovered since. None of this counts non-pension savings people have stashed away for their retirement, or the value of their homes and businesses.
Of course, these pension assets might be poorly distributed, with a few people having lots and many having too little. So if there’s a retirement saving problem, where is it to be found?
Canada has essentially solved the problem of poverty among the elderly. The Canada Pension Plan (CPP), together with the Old Age Security (OAS) and Guaranteed Income Supplement (GIS), puts a floor below which the pension income of most retirees won’t fall.
The rich are quite able to take care of themselves when they retire. So if there is a problem, it would be among the middle class.
But public sector workers have, if anything, overly generous pensions plans. They certainly don’t need the government to force them to save yet more for their retirement.
So we are now down to middle-class workers on private sector payrolls. There is evidence that some middle-income earners are not saving enough to generate the 60 to 70 per cent of pre-retirement income generally considered suitable for a comfortable retirement. But we don’t know a great deal about these people or their circumstances.
For example, this shortfall may be due to poor data that does not capture all sources of retirement income and therefore may be misleading.
So if there is a problem of inadequate retirement savings, it is a narrow one. Of the two broad approaches to fix this potential problem — an across-the-board expansion of the CPP or pooled workplace pensions — which is better fitted to the actual problem?
Advocates of a Big CPP, like trade unions, some provinces and the outgoing head of the CPP, are aiming a howitzer at a gnat. The problem with big universal solutions to narrow, targeted problems is that they increase taxes and benefits for people who don’t need them, like public sector workers, the rich, and those on low incomes who get the full panoply of CPP, OAS and GIS. Pooled pensions, by contrast, focus tightly on those who may need help accumulating retirement savings.
The Big CPP proposal aims to force all Canadians to save more for their retirement by raising premiums and benefits. They make the easy assumption that if you force people to save, they’ll have more money for retirement. Let’s check that assumption.
Canadians who participate in registered pension plans (i.e. workplace pensions or RPPs) are forced by those schemes to save. If the equation “more forced savings equals higher retirement incomes” held true, RPP participants would have higher retirement incomes than non-participants. Inconveniently for the Big-CPP advocates, they do not. Higher forced savings may simply lead them to reduce voluntary savings elsewhere, including in home equity.
Our future middle-class retirees now have an impressive array of vehicles available to help them save. RRSPs are quite widely used in Canada, with age and income taken into account. And the removal of the foreign property rule allows Canadians to diversify their investments — and hence their risk — more than ever before. The introduction of the tax-free saving account has added an important new saving vehicle whose impact we cannot begin to measure. And, finally, Ottawa has recently introduced pooled pensions, which add a valuable targeted tool. Unfortunately, the provinces are dragging their feet on making these pooled pensions effective. They should get the lead out.
Pooled pensions are a thoughtful supplement to an effective system and can make an efficient and low-cost workplace retirement saving plan available to the majority of private-sector workers who have no such plan.