Pension crisis...what crisis?

Pensions seem to be a political football that no Canadian politician can resist kicking around. The latest “solution” coming out of Ottawa, floated Thursday, is a new hybrid “target-benefit” pension scheme that would be a sort of middle ground between traditional defined-benefit pensions and the more market-oriented defined-contribution plans favored by modern employers.

I was once briefly enrolled in something like this in the late 1990s when working at the Financial Post. At the time, management was encouraging staff to switch from the DB pension to something called TRIPP, which was basically a defined-contribution plan that “targeted” a certain retirement benefit in the future, but of course this “target” was not a guaranteed promise. In my case, at least, it was ultimately rolled back into my personal RRSP, and it was not a staggeringly large sum. After a few more corporate reorganizations, most of us ended up back in a more traditional DB pension, or opted out to maximize our RRSP room. What a concept: letting workers choose between taking market risk or being sheltered from it!

This latest federal proposal appears to be a similar hybrid creation, one that emphasizes the need to share investment risk between employers and employees. Under the pure DB model, employers bear the investment risk while under a pure DC model, workers bear the risk, just as RRSP investors do: when markets are up, things are great; if not, then not so much. But this proposed hybrid rapidly gets complex, with the same issues of pension surpluses or deficits that have plagued traditional DB pensions. It would have two classes of benefits. If the pension fund were in deficit, so-called “base benefits” could be lowered, but only “as a last resort.” In addition, there would be “ancillary benefits” that would be what I’d term “less guaranteed”: if markets were down and the plan seemed to be headed to a deficit, these would be the first benefits to be cut; on the flip side, if markets were going gangbusters and the plan enjoying a fat surplus, there would be the possibility of higher benefits.

In short, those now in DC pensions should view this as attractive, especially if the plan gives retirees some pooling of longevity risk: something that doesn’t happen with either RRSPs or traditional DC pensions. However, those who have long been in the safe harbour of DB pensions would probably see this as a comedown with the diminished assurance of guaranteed payouts in retirement. In any case, this proposal applies only for Crown corporations and federally regulated firms in the banking or transportation sectors. You can find the 37-page consultation paper from the Department of Finance website here.

Fraser Institute: CPP expansion and Ontario Pension Program rely on “misguided analysis”

The same day this story grabbed most of the media’s attention, the Fraser Institute released a study that questions whether there’s any kind of pension crisis at all. The paper, entitled The Reality of Retirement Income in Canada, was summarized in Thursday’s Financial Post by the report’s author, Philip Cross, running under the headline “No pension crisis.”

Cross, formerly of Statistics Canada, said Canadians are already “well protected in their retirement” and that therefore “blanket increases in pension coverage are needless.” I tend to agree, as I wrote in a recent issue of MoneySense when addressing proposals for an expanded CPP. The impulse for a “Big CPP” is, Cross wrote, “based on the fundamental assumption that the public is too ignorant or misguided to plan for retirement themselves and that the meddling hand of government bureaucrats can help guide them.”

Let’s face it: we already have RRSPs, TFSAs, Registered Pension Plans offered by employers, CPP, OAS, GIS and finally that other federal proposal that’s well under way: the PRPP or Pooled Registered Pension Plan. If that’s not enough there’s always the so-called “fourth pillar” of non-registered investments and real estate, not to mention a “fifth pillar” of support by family, friends and inheritances. If after all that, there are still a few pockets of poverty among seniors—Cross suggests there is among single or widowed elderly women who have never worked—these might better be addressed by better targeting of existing government benefits, Cross says.

As The Economist argues in its current cover story, “A Billion Shades of Grey,” people are living longer and healthier and many intend to stay in the workforce longer, particularly the well-educated well-paid “knowledge workers” like yours truly and presumably many readers of this website. This trend is well under way in Canada too: Cross points out a quarter of Canadians aged 65 to 69 are still in the workforce, double what it was a few years ago. He makes a point I’ve made in the past, and which is similar to one of 42 “Tips” in the upcoming June 2014 issue of MoneySense: “Every extra year of working produces a double benefit of generating more income and reducing the years saving(s) are withdrawn for retirement.”

The fact is a cornucopia of tools already exist; publications like MoneySense are dedicated to the notion of showing readers how best to take advantage of them. Enough with reinventing the wheel: if there are some minor cracks in the system, by all means fill them. What Canadians need to do is get behind the wheel of existing programs and start driving seriously to the destination called retirement. I’d prefer to call it “financial independence” but we’ll save that topic for another time.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.