The future of pension plans in Canada

Many articles about pension reform and ‘the sky is falling’ predictions about pension plans are showing up in financial sections of newspapers, financial magazines, editorial pages, and around tables at Tim Horton’s.

Debates rage about expanding the Canada Pension Plan, introducing new rules about workplace pensions, and about what politicians could do to stem what is an emerging income crisis in Canada’s aging population.

Baby Boomer are getting older

Forty per cent of employees will be over 55 years of age by 2017.

Seven million Canadians will be retiring in the next 20 years.

Increased longevity, fewer workers and taxpayers, more pensioners, low interest rates and investment returns mean underfunded pensions and lower personal savings.  Costs continue to rise for housing, energy and medical care.

No wonder the 45+ crowd is advised to save earlier and more, are concerned about their retirement income, plan to work longer and are more pessimistic generally!

Pension Plans in Canada

Canadians have the federally funded Old Age Security presently granted at age 65.  The first quarter of 2014 it is $551.54 per month.  It is taxed and gets clawed back entirely with incomes of $115,716.00.

Related article:  Three changes to Old Age Security 

Your Canada Pension Plan is based on your years of employment and Service Canada can let you know what to expect for that.

Related article:  How much will CPP pay you in retirement? 

Some pensioners with low income can apply for the Guaranteed Income Supplement that lifts seniors to just above the poverty line.  The Service Canada website has information about this option.

Related article:  Understanding GIS 

Only 40 per cent of Canadians have work place based pension plans.  Some of these are Defined Contribution where the employer makes contributions.  The employee can choose a level of risk for investment.  The pension then depends on the amount available at retirement.

Defined Benefit pensions are based on a formula of contribution involving earnings and years of service.  The employer manages the money and the payout, investments, and risks are handled by the employer.

Related article:  Defined Benefit vs Defined Contribution Pensions 

The Third Rail

Jim Leech formerly of the Ontario Teachers’ Plan and Jacquie McNish of the Globe and Mail have just written a timely book on pension plans in Canada.  It is called The Third Rail named for the electrified rail on the subway track that is instant death if touched.  That is the view that politicians apparently have in regard to dealing with pensions.

They outline the pension reality in Canada and support the positive effects of the defined benefit pension that some companies have been shedding.  They point out that the OAS and the GIS are funded 100 per cent by taxpayers while only a small percentage of defined benefit pensions of government workers, for example, are paid for by taxpayers.  The Ontario Teachers’ Pension Plan breaks down to 11 cents paid by teachers, 11 cents by taxpayers and 78 cents from investments for every dollar a retired teacher receives.

They also point out that defined benefit retirees support local economies by spending more money as they are more secure in their futures than other retirees.  They pay more in taxes as well.  In addition, the investments made by defined benefit pensions, support the economy and contribute greatly to national prosperity.  The top 10 funds invested over 400 billion in Canada!

It is an interesting read and a great addition to the debate about pensions we are having in Canada.

Written by Donna McCaw

Donna McCaw is the author of It’s Your Time about the choices and decisions in preparing for retirement, a storyteller and speaker who helps people make informed and positive transitions to retirement. She does courses and presentations on Retirement Readiness and Women and Retirement.

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