More than seven million Canadians will retire over the next two decades. The baby boomers (the 45- to 65-year-olds who make up 42 per cent of Canada’s workforce) will create the largest job exodus in Canadian history.
Retirement will be a very bleak place for the unprepared, and indications are that many boomers (and others) will be very poorly prepared.
In their very good new book, The Third Rail: Confronting Our Pension Failures, Jim Leech and Jacquie McNish make a compelling case that the Canadian pension system is flawed. While I agree that many of us will fall far short of the comfortable, worry-free retirement we desire, we disagree on the solution.
Poor savings rates
Two generations ago, Canadians were saving an average of 20 per cent of their disposable incomes for retirement. Today we save just 2.5 per cent. If those non-savers are counting on government or employer pensions to salvage their retirement, they’ll be in for a shock. A big one.
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Compounding the savings shortfall is the fact that the boomers will need more retirement savings than any other generation, given that they’ll live longer than any previous retirees.
The Canadian pension system has three-tiers – the Canada Pension Plan, Old Age Security and Guaranteed Income Supplement – is intended to provide only a basic retirement income. A couple getting the average of those three income sources may have the bare essentials, but nothing more.
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Most working Canadians have no pension plan of any kind and the top-drawer defined benefit plans are being abandoned in favour of less secure defined contribution plans.
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The book’s authors, Ontario Teachers’ Pension Plan CEO Leech and senior Globe and Mail writer McNish, contend that Canada’s retirement income system must be significantly revamped in order to close the gaps in our savings system.
Canada has the capacity to diffuse the ticking pension time bomb, says Leech, but it will require tough choices. It's time for businesses, governments, unions and employees to save our pension system and, with it, the boomers’ retirement lifestyles. While the boomers are the immediate working generation affected, the changes would make the pension system sustainable for following generations also.
This is a very good book, certainly not the dull dissertation you’d expect given the topic. You don’t need to be a finance nerd to enjoy the book, and anyone interested in the Canadian pension system should consider reading it.
The problem with our pension system is that fewer than 40 per cent of working Canadians have an employer pension plan and, as inadequate as it is, we’ve come to depend on the combination of CPP, OAS and GIS. Those government benefits were never intended to provide more than an income floor.
Many middle-income workers will suffer significant declines in their retirement incomes.
In my view, the solution is easy, even if the execution is not. Our system of RRSP savings is excellent. Contribute to an RRSP early and often and a comfortable, worry-free retirement can be yours.
However, we delay, make inadequate contributions and stop contributing because markets are doing poorly or for some other excuse as we spend our money on other, less important things. I’d argue that it’s our fault if our retirement savings are inadequate, not that of the Canadian pension system.
Is expanding CPP the answer?
Regardless, Leech and McNish make the point that many public-sector plans must be redesigned in order to be sustainable. I can’t argue that, unless you’re talking about implementing significant increases in CPP contributions.
The current payroll contribution rate is 9.9 per cent (split evenly between employer and employee) on income between $3,500 and $51,100. A proposal from Prince Edward Island that has gained some support would roughly double the maximum pensionable amount and make the combined contribution rate 13 per cent on income between $25,000 and $51,000. The combined contribution rate would be 3.1 per cent – up from zero – on income between $51,000 and about $102,000.
Related article: Should CPP be enhanced?
I disagree with across-the-board increases at this time as that would impede a fragile economic recovery. Many businesses are struggling and the increased contribution requirement would further impair their viability.
If you want to adequately provide for your retirement, do your own preparations. Properly fund your own retirement savings and stop depending on the government to provide for you. I think expanding CPP and OAS is a discussion for another time.
As they say, “If it’s to be, it’s up to me.”