Fifty per cent of Canadians will be feeling the burn as they face big cuts to their standard of living at retirement and despite pension reform, there appears to be no relief in sight.
Public pensions are one of the largest single items of government spending in most industrialized countries. Now we have a perfect storm of aging populations, slowing economic growth, and disappearing private pensions. This is putting pensioners, policy makers and politicians between a rock and a hard place.
Building a pension platform
Let's take a look at the history of government pensions in Canada:
- In 1952, the Old Age Security (OAS) for people 70 and over became the first universal old age pension in Canada. Those 65 to 69 could get the income tested Old Age Assistance.
- In 1957, the Registered Retirement Savings Plan (RRSP) gave a vehicle for tax deductible contributions that would be taxed upon withdrawal during lower income retirement years. At age 71, the pensioner needs to convert them in some way. These can be converted to a Registered Retirement Income Fund (RRIF) at age 71.
- In 1965, the Canada Pension Plan (CPP) legislation passed and the OAS age qualification went down to age 65. The CPP still is compulsory, earnings related and deducted from pay. The self-employed pay double.
- In 1966, the income tested Guaranteed Income Supplement (GIS) was created with payments starting in 1967.
- In 1985, then Prime Minister Brian Mulroney attempted to cut back the public pension system but met with Grey Power opposition forcing him to back away from that idea.
- In 2008, the Tax Free Savings Account came about to provide tax free growth with the maximum contribution now at $46,500. This can contain eligible investments and is NOT just a savings account.
What are the Pension reform issues today?
There's no surprise about the key issues that we face with regards to pensions and retirement:
- We have an aging population increasing the ratio of retirees to workers reducing the tax base thus upping the dependency rate.
- Debt levels are even higher than in 2008 when the warning bell went off about the dangers of this high debt.
- Canadians have very low savings rates especially dangerous for the $30,000-$100,000 middle class income levels.
- Employer pensions, especially defined benefit ones, have been disappearing steadily.
- We have slow economic growth with no upticks in sight.
- Rates of unionization have fallen with 27 per cent of full time Canadian workers unionized and only 14 per cent in the private sector. Union membership means higher wages for many and that good income plus pension scenario is eroding.
ADDING IT ALL UP
Canadians collecting Old Age Security receive $570.52 monthly and it is indexed and adjusted quarterly.
Not everyone wants or needs an RRSP as their income is too low to benefit, they have other uses for their funds at the stage of life they are at, a TFSA would suit them better and so on. The participation rate is roughly 55-65 per cent but not everyone fully funds their RRSPs by any means.
The Canada Pension Plan (CPP) is likely the best way to boost middle income earners’ retirement incomes and the Liberals did talk about this in their campaign. However, 7 out of 10 provinces representing 66 per cent of the populations would need to be on board. Not likely to happen. Ontario is going it alone in developing the ORPP for 2018, Quebec has its own pension, while Saskatchewan and Manitoba say no way.
For information on the GIS, go to servicecanada.gc.ca.
As for the Tax Free Savings Account (TFSA), only 7 per cent of Canadians have made maximum contributions. Only 41 per cent have one at all. That leaves 59 per cent of Canadians without one. Not the panacea the government hoped it would be!
Do you have suggestions for policy makers and politicians?