Pooled Pensions and Mandatory Savings.
We, as an industry and as a Nation, have known for some time that Canadians are not saving enough money for their retirement. Since 2008, the lack of savings among us has been played out in headlines in all of our national and local papers on what seems like a weekly basis. With an aging population there is a real concern that our social system (CPP, OAS, etc) will not be able to handle or provide enough for everyone that will be retiring.
Twenty years ago when I started in this profession I read a stat that said only 40% of Canadians contribute to an RRSP and only about 8% maximize their contribution. I would say that number has not changed in those 20 years. Recent studies have said the savings percentage is about 39% now. Not much has changed.
Why Don’t we Save?
It seems easy, put money away on a regular basis and over time you will have accumulated a significant amount that will go towards your golden years. Why don’t people do this? First off, it takes discipline. It requires sacrifice. We don’t live in that type of world anymore. Easy credit, lending rates at all time lows. Money is cheap, it is easy to spend and live for the now and not the later. “I will start saving next year.” Next thing you know, 10 years have passed. Also, it is an expensive world and if you are someone who is being paid the minimum wage, it is very difficult to pay rent/mortgage, put healthy food on the table, expenses and then have money left over to contribute to a retirement savings plan. If you have children that just adds to the day to day costs.
Related article: 5 reasons why people are not saving money
Pooled Registered Pension Plans
The Government of Canada recently unveiled the Pooled Registered Pension Plans (PRPP). These plans are to provide a tool for small business or self employed people who don’t have access to a pension plan to help with savings. It will provide a low cost, low administration alternative to those who don’t have access to larger plans.
The industry already has these. There are Group RRSPs, DCPP, etc that are low to no cost to the employer and offer away for small businesses to help their members save. The self employed have RRSPS, TFSA and other tax efficient ways to save for their own retirement.
The key here is not providing more plans, it is making people save.
Related article: Keys to success of the new Pooled Registered Pension Plan
The best way to improve the savings rate is to make it mandatory. Today, if you enrol in a benefits package at a new employer, you have to take the group life and health unless you have coverage elsewhere. Why would we not make it mandatory to take the group savings plan as well? It should be part of your employment contract at the company you work at. If a company doesn’t have a plan, there are many institutions that a quick phone call to would remedy the situation in a heartbeat.
In Australia, they have a mandatory savings program for employees. Statistics show that up to 90% of Australians have some type of savings. It is compulsory for employees to contribute and from what I have read also compulsory for employers to contribute. There are also restrictions on withdrawal from these savings plans. Not withdrawals when you retire but restrictions on withdrawals for when you want to go on a ski trip. Retirement savings are for retirement. It is also low cost. Australia also promotes financial literacy by offering it in schools as part of graduating.
Related article: Is mandatory savings the key?
If Canada wants to increase the retirement savings rate, the most effective way would be to make savings mandatory and develop a program that encourages businesses, employees, the stay at home parent and the self employed to save towards their retirement.