It’s been a long wait to see meaningful action on giving the Canada Pension Plan a bigger role in our overall pension system. Some of us have been around long enough to remember the heady days of 1981 when a high-profile National Pension Conference was held and raised some hope that meaningful reform was not far away. But here we are in 2013, and basically no progress has been made over more than three decades. In fact, there has been some erosion of Canada Pension Plan provisions — for example, the penalty for taking an early CPP has been increased.
In hoping for an expansion of the Canada Pension plan now, are we — borrowing from a Paul Simon song — “still crazy after all these years”? Federal and provincial finance ministers are meeting in June and hopefully they will coalesce around significant improvements in the CPP, particularly given that the majority of provinces and the majority of Canadians believe that action is required.
Action on the CPP is a priority now given that workplace pensions are under attack — particularly defined benefit pension plans which put the responsibility for managing investment performance risk on employers. Employers have been successfully shifting the risk to employees through the replacement of defined benefit plans with defined contribution plans. In this climate, even strong unions can come out of collective bargaining on pensions with a two-tier pension system — defined benefit for existing employees and defined contribution for new employees. Unions are not in a happy place when this is the best deal that can be made.
The difficulties that unions are facing in maintaining good pension plans in the workplace — however important an issue — does not capture the whole reality. Only about 35 per cent of the workforce has an employer-sponsored pension plan. Outside the public sector, less than 20 per cent have one. The combination of a low CPP rate and a modest level of OAS cannot provide an income-replacement rate that would forestall a drastic drop in standard of living in retirement.
RRSPs and other personal savings vehicles are touted as the answer to bridge the gap for those without good workplace pensions. But only about one-quarter of those who file tax returns claim an RRSP deduction. And contributors are skewed towards the highest-income groups. There is no mystery why this is the case. Those with the highest marginal tax rates get the biggest benefits given that RRSP contributions are a deduction off taxable income rather than a tax credit. The result is a hugely inequitable system.
Another dark side of RRSPs is the management fee system. In the case of the mutual fund industry particularly, fees are among the highest in the world and result in a significant erosion of the rate of return that ends up in the contributor’s hands. The fees aren’t particularly visible — and financial institutions aren’t particularly keen to reveal them.
The effect of these fees has received somewhat more attention recently. For example, the Canadian Labour Congress has a very useful calculator on their website that allows you to see the dramatic negative impact of the fees. The fee issue has also been highlighted by those who can hardly be accused of having a labour bias, or a bias in favour of expansion of the Canada Pension Plan. A spring 2007 article in the Canadian Investment Review by Keith Ambachtsheer and Rob Bauer — “Losing Ground: Do Canadian mutual funds produce fair value for their customers?” — concluded:
“The preceding financial analysis suggests that the vast majority of the 60% of the Canadian workforce who are not members of occupational pension plans will have a very difficult time generating adequate pensions by investing their retirement savings through the mutual fund sector…The sales/investment expenses wedge being imposed by Canada’s for-profit financial services industry is simply too large.”
The language of these academics from the Rotman International Centre for Pension Management at the University of Toronto is quite polite — we believe words such as “skimming” and “exorbitant” are appropriate.
While the Canada Pension Plan is the centrepiece of required improvements in the pension system, additional measures are required as part of an integrated reform of the pension system. The benefits of expansion of the CPP will accrue for the most part to future retirees. An increase in the OAS/GIS combination is required to lift all current retirees and seniors above the poverty line. We have reduced the poverty rate of seniors over time — but surely that is not good enough. In addition, there is a continuing need for legislative changes to protect workers in the event of plan windups and bankruptcies.
We are cautiously optimistic that meaningful improvements can be achieved — it’s not just time, it is overtime. The Canada Pension Plan is simply the best vehicle to improve pension outcomes on a long-run basis — it is universal, portable, indexed and well managed. The logical arguments for expansion are overwhelming and public support has remained high despite diversionary measures that have been introduced such as Tax Free Savings Accounts and Pooled Retirement Pension Plans. These are not pension plans and are poor substitutes for expansion of the CPP. We also glean hope from the fact that surely most of the provinces attending the June meeting will recognize that pushing decisions off by having more study groups and committees borders on the ridiculous. Moreover, the slogans of the financial industry are hopefully wearing thin. One major bank tells you to come on in because “you are richer than you think.” Well, sorry, you’re not. Let them try that line on former Nortel employees after their retirement medical benefits have been cancelled and their pensions have been sharply reduced.
But why is our optimism restrained and cautious? Employer groups will scream about the increase in contributions rates that will be required to fund a doubling of the CPP benefit rate — even though proposals to do so would be implemented on a gradual basis. In addition, the financial services industry is not about to look the other way as they see their “take” from the existing system threatened. Their influence may sometimes be under the radar — but they have a business-friendly and compliant federal government they believe they can count on. Hopefully, the vested interests won’t buy off reform — but, still, ringing in my ears is the Bob Dylan line: “Money doesn’t talk, it swears.”
Retiree Matters is a monthly column written by members of the Congress of Union Retirees of Canada (CURC) that explores issues relevant to retirees, senior citizens, their families and their communities. CURC acts as an advocacy organization to ensure that the concerns of union retirees and senior citizens are heard throughout Canada.