If you look at the newspapers this week, you could be forgiven for thinking that there have been sudden dramatic changes in Canadian pension plans. It seems like everyone is writing articles about the pension crisis – disappearing pension plans, bankruptcies, workers losing plans, retirees afraid of starving.
Unfortunately, lot of what is being written is confusing and in some cases, confused, so I’ll try to briefly sort out what the issues are, and what answers we need to be looking at.
Broadly speaking, there are really two main issues – different, but related. The first is how we can provide a decent retirement income to all Canadian seniors. The second is the status and future of workplace pension plans.
1. I’ll start with the broader problem of retirement income for everyone. Much has been made of the slow but steady decline of workplace pension coverage, particularly in the private sector, over the last few decades, from a high of around 45% of all paid workers, to about 38% now. This is certainly important, since it means that fewer future seniors will have a significant private pension to draw on in retirement.
However, since this is a long-term trend, and private workplace plans never, at any time, covered even half of the Canadian workforce, this is really not hot news. Most Canadian seniors get most of their retirement income from the public pension plans – the Canada/Quebec Pension Plans, Old Age Security and the Guaranteed Income Supplement. This is not going to change even if we stop the decline in private pension coverage, and even bump it back up to historic highs.
The public system, since it was constituted in its present form in the 1960s, has done a good job of bringing most seniors out of poverty. The clear answer to the broad problem of guaranteeing a decent retirement income to all Canadians is to improve public benefits. Raise Old Age Security and the Guaranteed Income Supplement to bring all seniors above the poverty line, and increase Canada and Quebec Pension Benefits going forward to provide a better rate of income replacement for retiring workers.
Public pensions are efficient, universal and virtually risk-free.
There have been other proposals involving voluntary or mandatory investment funds run in a variety of ways. These “solutions” present many problems. In most cases, they do not provide universal coverage, they shift all of the risks to individual Canadians, and they are much less efficient and more expensive to run than simple improvements in the public plans. They are being touted primarily because they would likely provide a fee bonanza for our already bloated investment/mutual fund/RRSP industry.
2. The second broad issue is the state and fate of workplace plans. As we said, coverage has been declining. While they cover only a minority of the workforce, workplace plans are still very important, to the members, retirees and their families who have agreed to forgo wages over their working life to have a more comfortable retirement. They deserve protection.
Over the last decade defined benefit pension plans have been hit by up-and-down stock markets and low interest rates that have created large funding liabilities for many plans. Some of these deficits can also be attributed to the ease with which employers were allowed to use surpluses generated in good years in the 1980s and 1990s to take contribution holidays.
Plan members have been especially hard-hit when employers with underfunded plans have gone bankrupt. Since only Ontario has a (limited) pension guarantee fund, and pension liabilities rank low in bankruptcy priority, many members and retirees have faced major reductions in their earned benefits.
Stock market collapses have hit defined contribution plans and RRSPs hard as well, with the greatest effect on those close to retirement.
There has been a lot of discussion over the last decade about changing the funding rules for defined benefit plans [See my article “Pensions – A Tale of Two (and a Half) Commissions”]. Many employers want to loosen the funding rules to make plans “more attractive” (to themselves), but we need rule changes to make these plans more, rather than less, secure – including clearer employer responsibilities to fund deficits, restrictions on contribution holidays, a national pension insurance fund and higher priorities for pension plans in corporate bankruptcies.
Governments are being very cautious about moving forward on pension regulation. So far we have seen only limited temporary funding relief measures to help employers in poor financial shape.
It is important that, when our governments do put forward their new pension legislation, it does in fact increase pension security.
3. A Final Word
While there is some potential for expanding workplace pension coverage through multi-employer plans, this will not be the answer for most Canadians. The key to guaranteeing a decent retirement income for all Canadians is improving our public pension benefits.
This is the key theme of the Canadian Labour Congress lobby campaign this fall. Pensions are on the public policy agenda across Canada. The federal and provincial governments are meeting in Whitehorse in December to discuss pension issues, and there may be a national “Pension Summit” next year. Whether or not we are facing a “pension crisis”, it is crucially important that we ask the right questions, and get the right answers for the future wellbeing of Canadian seniors.