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Are We Ready to Fix Our Pension System?
The Toronto Star reports, Lowering costs a vital objective for lifting retirement incomes:
A leading pension expert has priced what is now at stake in Canada’s national debate over how to boost future retirement income.
Keith Ambachtsheer estimates fees on $700 billion held in individuals’ retirement savings plans are sapping about $8.4 billion more than contributors would pay if they could save inside a type of large-scale pension or savings plan.
The cost of fees is about 1.2 per cent of their total savings, enough to cut future retirement income by nearly a quarter.
That constant drag on investment returns only compounds the problem of poor investment decisions and too little savings, he says.
The director of the Rotman International Centre for Pension Management expressed optimism yesterday that, despite a discouraging turn of events this week, there is still a chance that more middle and upper-income Canadians will get a chance to join a low-cost savings plan.
“Those who are impatient to get things done, hang in there, we’ll get there,” Ambactsheeer told a Conference Board of Canada pension conference held in Toronto Wednesday.
The conference is one of several being staged as part of national consultation process aimed at finding agreement on a saleable proposal for ramping up Canadians’ retirement savings.
Until late last year, British Columbia and Alberta seemed prepared to set up a large-scale savings plan for citizens. But they hold off for a potential agreement on a national strategy, including the possibility of a expansion of the Canada Pension Plan. Now Alberta seems to want a go-slow approach.
At another conference in Calgary Tuesday, Alberta Finance Minister Ted Morton said the province would rather see an “incremental” approach — a few regulatory changes to give financial institutions more leeway to encourage people to save.
He said financial institutions should be given about ten years to show what they can do,
before governments step in with a heavy-handed approach.
“I think trying to get an expansion of the CPP would be a very hard sell to Albertans,” Morton told reporters.
It’s estimated it would cost workers and employers a total of nearly 16 per cent of pay, instead of the current 9.95 per cent, to double the current maximum CPP pension to 50 per cent of pay. CPP now only about $11,200 a year to someone who has earned more the equivalent of $46,300 a year over about 40 years.
Ontario Finance Minister Dwight Duncan said Wednesday that “Alberta has clearly done a 180 (degree turn).
“Frankly, I wasn’t all that surprised because their initial position — and I don’t want to sound partisan with this — seemed out of character with the general view of government and the private sector.
“British Columbia moved back from its position. I think they went out without looking at all of the economic and political fault lines around this issue, and didn’t really address issues of who would pay.
“That’s why we have taken what I consider a prudent approach, kept a number of options alive and facilitated discussion, and we will continue to do that.”
Duncan said it may be the case that some Canadians would like to save money at a lower costs, but “there are some $900 billion of unused RRSP contribution room. So people may want that, but they are just not doing it.”
He concedes the losses on the stock market in 2008 may have been a wake-up call when it comes to retirement saving.
Indeed, a poll of Ontario adults commissioned by the Healthcare of Ontario Pension Plan, suggests most adults would like a pension that paid about two-thirds of pre-retirement earnings.
“Our survey found that 67 per cent—that’s over two thirds — of respondents were interested in being part of a defined-benefit plan,” HOOPP President John Crocker told the conference.
Of course Canadians want the security of a defined-benefit (DB) plan. Why should DB plans only be reserved for public sector workers, teachers, firemen, policemen and MPs? Don't we all have a right to retire in dignity and security?
I am starting to ask myself a lot of questions about what is best for Canada and how we can rectify some of the serious problems plaguing our pension system. Of course, to rectify the problems, you first have to admit there IS a problem.
If you're a fat cat banker or insurance executive collecting huge fees while you underperform the market, you don't want to change a thing. You're calling Finance Minister Flaherty and Prime Minister Harper, lobbying MPs, telling them to let the private sector deal with our pension ills.
But Keith Ambachtsheer is right, the fees are sapping savings plans because most mutual funds charge outrageous fees and most underperform the market (you're better off investing in a low cost index fund).
But are public DB plans doing any better? Not necessarily, but they do manage to bring down the fees and if they tighten their governance - something which Mr. Ambachtsheer conveniently sidesteps - then they would be better than what the private sector is offering.
Feeling the threat from DB plans, the private sector is stuffing as many industry hacks as possible on the board of directors at public funds. This is part of the governance problem at these large funds and why so many of them are paying ridiculous compensation packages to senior pension fund managers.
Anyways, back on topic. This afternoon, I had an interesting conversation with Susan Eng, VP Advocacy at CARP. Susan isn't a pension expert but she gets it, and she is a quick learner. We talked a little about what needs to get done.
I mentioned that automatic RRIF withdrawals should be abolished and that people working past the age of 71 - people like my dad and many others - should be allowed to shove money back into their RRIFs. Instead, the Government of Canada penalizes these individuals by forcing them to take money out of their RRIFs so they can tax them. This is ludicrous!
But that only helps solve part of the problem because even if they are able to build up their savings, they still need to make wise investment decisions or risk losing it the next time markets get whacked.
Again, we need to offer all Canadians the peace of mind that comes with a defined-benefit (DB) pension plan - not just those that work at public sector jobs. I told Susan that it's sad but more and more younger folks are looking around, seeing private sectors jobs and pensions disappear, and they're opting to work for the government.
I am deeply concerned for the Canadian economy if younger workers are opting for the safety of government jobs instead of working in the private sector. Let's not forget, it's the private sector that generates jobs and tax revenues to pay for public sector jobs and pensions.
But all this tells me that we need to rethink capitalism and the social contract. It simply isn't working. Sure, the financial elite love it as they profit off the misfortune of others, but for the great majority living with constant stress and fear that they will one day face pension poverty, something has to be done.
So what needs to be done? There are many great ideas out there but there is an equal amount of disinformation and fear mongering. For example, I forwarded Susan Eng and Bernard Dussault, the former Chief Actuary of Canada, an article from the Toronto Sun, Expand CPP to meet pension needs:
Expanding the Canada Pension Plan would be the most effective way to ensure Canadians have enough income to support themselves in retirement, a report from an independent think tank said on Wednesday.
Canada’s public pensions replace a relatively low percentage of pre-retirement income compared with other industrialized nations, the Canadian Centre for Policy Alternatives said. The CPP and OAS replace about 40% of the income of someone earning the average wage, compared with estimated needs of about 70% of pre-retirement income, it said.
"There is now widespread concern that unless changes are made, a significant number of workers will reach retirement age without sufficient income to support themselves," CCPA Research Associate Monica Townson said.
"Expanding the CPP, whether by increasing the replacement rate or increasing the level of covered earnings, or both, would address the issue of coverage, security of benefits, and low cost of administration - all the key objectives of pension reform," she said.
Federal, provincial and territorial finance ministers are scheduled to hold a second major summit on pension reform in May, amid concern that private retirement savings are not high enough to support basic living expenses once many Canadians retire.
The rapidly ageing population will make the problem worse, with the baby boomer generation leaving the workforce.
Alberta’s Finance Minister Ted Morton on Tuesday said he would not back efforts to expand the CPP, saying instead changes should be made to encourage people to save more.
He said expanding the CPP, which would mean greater contributions for those remaining in the workforce, would mean the younger generation is shouldering the burden.
"Certainly the unfairness to young Canadians is a serious issue to the current CPP. I don't see why we would expand a system that's unfair to such an important group," he said.
Several options have been put forward for expanding the CPP at various costs to the worker.
The Canadian Labour Congress for example proposes doubling the replacement rate from 25% of covered earnings to 50%. That would take the worker contribution rate from 4.95% to 7.7% by 2016.
A separate proposal put forward by the Federal Superannuates National Association would push the replacement rate to 70%. That would take contributions up to between 15.4% and 19.8% depending on the earnings bracket.
Mr. Dussault was quick to point out that Mr. Morton's argument was totally inaccurate:
Alberta Finance Minister Ted Morton is seriously misinterpreting the impact of a CPP expansion by saying "expanding the CPP would mean greater contributions for those remaining in the workforce, would mean the younger generation is shouldering the burden."
This is totally inaccurate. Indeed, as required by the CPP Act, any improvement to CPP benefits shall be fully funded, whereby each generation is paying for its own benefits.
And as far as expanding the CPP, I told Susan Eng that we need to take the opportunity to create several large DB plans spread throughout our country. We can implement best standards incorporating the best governance rules from around the world, focusing on delivering a safe retirement income for as many Canadians as possible.
I also think the CPPIB should be cut in half. I am against concentrating power in any one big fund. In fact, I think after $100 billion, most public pension funds become too big, too bureaucratic and way too arrogant. Chop them up, and spread them out in different regions.
What else would I love to see? Let's amalgamate all these city pension funds - many of which are terribly managed and chronically underfunded - and roll them up into these new large DB plans. I would also like to offer private companies who are looking to scale back their DB plans or cut them the option of rolling them over into these larger public DB plans.
In my ideal world, private companies would not be in the pension business at all. They can offer to top up CPP contributions, but pensions would fall under the public domain, much like health care does. If you truly think about productivity, this makes perfect sense for the long-run economic health of our nation. But I know I'm dreaming because there are powerful vested interests who want to maintain the status quo.
Finally, Luc Vallée of the Sceptical Market Observer sent me Blake Sutherland's thoughts on the demise of defined-benefit pension plans. This is an absolute must read, exposing some harsh truths that many people are completely unaware of.
I am all for bolstering DB plans. In fact, we have a golden opportunity to fix the pension system, offering all workers the opportunity to retire in dignity. Let's get this right, and let's not squander yet another opportunity to revamp our pension system. If done right, we can provide millions of Canadians a better future, one which offers them the peace of mind that comes with a secure retirement.
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I'm quite certain that any 'fix' will involve taking more money from me and giving less of it back.
I'd rather invest my time and the fruits of my labour with my children so when I'm unable to support myself, I will be taken care of by them and live with dignity while not relying on a bunch of accountants and financial wizards to keep the money flowing to support me. Trusting that family, friends, and community will take care of those unable to care for themselves should not be so difficult. Of course that requires that I do my part while I am able to. It's an old foolish idea I know.
Leo, while I agree we need some reform I am not quite clear why now is a "golden opportunity". I definitely do not agree with Mr. Morton that we should wait 10 years and see if more people are saving and buying mutual funds. In 10 years more than half the baby boomers will be 65 or older and the problems will be even more difficult to solve.
It certainly appears the financial services industry have been doing their lobbying and are going to try to hold back any expansion of CPP or other public plan. But I am not clear what they are offering in return, other than more of the same. While a patient and reasonably intelligent person can do okay with mutual funds and other private vehicles, the high fees are a problem. But it is better than nothing, which is what too many working people have.
In principle, I am not opposed to large privately managed funds, if they could control costs and take a long-term view of risks and returns. But that means the fund managers have to play a more important role than the marketing guys. I am not sure if the private financial institutions can do that. One bad quarter and some bad media coverage and they would be overhauling the portfolio.
They could also provide some balance and contrast to the large public funds. I too am concerned about the size of some of the public funds and the potential for out-of-control empire building, not to mention political interference.
What is really required is a strong regulatory environment and, as you always suggest, good governance, whether the funds are public or private.
Defined benefits are not really the issue. A DB plan is no problem if the contributions are sufficient and the expected returns are realistic. That is one point where regulation and governance really enters the picture. No matter what the form of the fund the potential for foolishness is infinite.
It comes down to who is going to pay for this and how. I prefer that we, the boomers, pay rather than leaving the bill to future generations (who might choose not to). But that is going to require thinking a few decades down the road, which is not always the norm among policymakers, particularly the political ones.
The most immediate problem are those lower middle-income working people who have few savings and probably have little ability to save. I live in Vancouver and I don't know how people earning less than $50,000 could have any savings here. They could face severe declines in incomes when they retire.
Now that we have mandatory health care in the US, pensions will be no problem as no one will be allowed to live long enough to collect them! Game, set, match! Welcome to our Pol Pot world, work until you drop dead! How is that hope and change working out for you, komerade? Get ready for foodless days, the North Korean way!
the money cannot and will simply not be available to fund promised pensions.
solving the pension problem is akin to trying to figure out how the sovereign debt is going to be repaid.
it can't be done. period.
Fuck pensions. Anyone who is dumb enough to work today for some promised income any further than 1 year out is a clown. You will not get what you want, you will not get what you were promised, you will get what you deserve. A good hard pounding. All pensions are slush funds rife with corruption. It's not their money so they could give a shit if it gets lost. Wake up pension fools! Take your present value distribution and buy some hard assets.
And that will be the beginning of the end when insiders take their "present value distribution" and cash out all the assets of the fund leaving others holding an empty bag.
To answer your question, no, I don't think we are ready to do anything real to fix the problems. People will not take the necessary standard-of-living hit that fully funding pensions would entail. I'm no expert, but as far as I can see if one wants to retire after 40 years of work with 80% of your final salary (avg. of last five yrs.) one would have to save roughly 25% - 30% of one's salary for their entire working life.
The LA Times recently published an article stating that more than half of the average person's IRA contribution is being eaten away in fees. It's not just a Canadian problem, it's a global problem. People are getting raped on fees!
You are all missing the point. Whether it is now or down the road, we have to reform the financial system, and reform pensions. It's inevitable, and for the sake of capitalism - true capitalism - I hope it's done sooner rather than later. I'm the furthest thing from a socialist, but I do believe we have to protect society's poor and weak. Instead, our whole value system is warped as we end up protecting the banksters who got us into this mess.
DB plans are NOT unaffordable because employees pay into them, and hopefully with some basic realistic investment assumptions, we can partially cover pre-retirement income. What's the alternative? To allow individuals to "fend for themselves" and be at the mercy of Casino Capitalism? Or allow them to keep getting financially raped by mutual funds charging ridiculous fees as they underperform the markets?
No, we need to rethink pensions and bolster the system.
Leo - just what's the difference if the individual is in the casino or the fund managers are in the casino PLUS taking fees and bonuses? In both cases the house always wins.
I think if pension funds had to mark-to-market we'd be in for an ugly surprise anyway. In China you don't have a consumer like here because they have to save 20 to 30% to fund their retirement years.
In Canada, just force people to put 25% of their income into Canadian Treasury Bills - safer and saner than the casino, no fees and a (sort of) chance you'll at least see something at the end even if it is in a depreciated FIAT money..
I'd rather hold mine in non-interest bearing gold thank you very much. Don't force me to do anything. Just stay out of my life and let me decide what is best for myself and for my family. Government has no business telling me how I should prepare for retirement.
Protect the poor? Go bleed your heart outside of the US.
"we have to protect society's poor and weak" and "end up protecting the banksters who got us into this mess" are the freakin bedfellows Leo.
The latter with their paid off politicians use the cries for the former to get nothing done except further their own bankrolls.
"we have to protect society's poor and weak" and "I'm the furthest thing from a socialist" is a contradiction Leo.
Protect them from whom? The Banksters? The politicians who abuse them? What a crock of garbage.
If Obama wants to protect the poor how come Obama signed Executive Order 13502 directing federal agencies to take bids for government construction projects to accept only those from contractors who agree in advance to a project labor agreement that requires a union work force?
And why exactly do we need public sector unions anyway? Because the taxpayer is an evil monopoly? Why don't we look at how much money union bosses like Andy Stern make? How many "poor and weak" can we feed off of the dozen "leaders" of unions who have pissed away pension money to get their boyz elected so a president can guarantee Executive Order 13502 which also guarantees that the taxpayer will overpay through the teeth for construction projects of questionable need.
Instead of overpaying for that crap we could help the "poor and weak." So the very people who are helping the "poor and weak" are screwing everyone else to NOT HELP THE POOR AND WEAK.
"I'm the furthest thing from a socialist" NO YOU ARE NOT.
I'm not missing the point. Here's what I see:
1. Social security was sold to the people as a retirement account, but the money goes into the general fund so it is no such thing.
2. The financial markets are, as Bill Bonner says, not a good place for a guy like me to be. To be able to "invest" in equities, one needs access to accurate financial data. FASB has abdicated its responsibility with regard to banks and who knows what else. I cannot rely on published data. I can't buy FI investments either with government willing to change bondholder priority as political payoff. I know why I shouldn't hold cash, but that's only half the story. What should I hold?
Finally, nobody's going to change anything until the system collapses. That's how meaningful change always occurs. The smoker doesn't stop eating donuts until AFTER the heart attack. Government doesn't reform finance until after the collapse. Like you, I'd love to see it sooner. Unlike you, I no longer believe I ever will. Don't misunderstand what I'm saying. I'm not angry or even saddened by it. I simply no longer care. My government and Wall Street have signaled to me that I am a lamb to be fleeced. I get it, 100%.
Right on. Instead of more legislation why not let the market set a reasonable interest rate instead of the forced ZIRP we now enjoy? Maybe more people would then "save" for their own retirement. Fund costs wouldn't be such a problem because the banks would serve their true function as intermediaries and would actually compete for savings of depositors. Accounting rules would have to be returned to force banks to reveal the true value of their assets and the saver could make a reasoned decision as to where to keep his money.
In short, let the market work and let the individual make his/her own choices. Do not assume that the great unwashed masses are stupid and unable to look after themselves. The only way that government should be involved is by enacting tax laws that encourage savings (like RRSP and Tax-free Savings Plans in Canada), stop forcing down interst rates and actually prosecute those responsible for the massive amount of fraud in the system. I think that this would resolve your concerns about people having a comfortable retirement. By the way, since when has a DB retirement plan become a human right Leo?
Hard to hear the truth and I agree with you.
Leo, actually Billwilson has a major to point to make. While I agree with your outlook, the age thing has got to go. The laws were passed in the states easily when barely anyone would actually get through a long retirement....an easy vote for any drunk politician. We can bolster the system all day but until we face reality that retirement age has moved from 5 to 20 yrs we are cooked. Its funny how everyone complains when the age moves or benefits are trimmed 'because its the law'....love it. The govt is breaking laws 3X a day to get through the changes they see fit....its actually holding up the 'gaming-the-system' process since we don't know what the new laws will be in some areas!!!! I guess they don't think its enough of an issue yet to make serious changes.
As I stated in my post, people are working longer, and the government is penalizing them. Retirement age should be move up, but the government shouldn't be penalizing those who work longer by forcing them to cash out of their RRIFs (IRAs). This is ridiculous.
Oh, it'll be an enormous backlash if taxpayers nationwide are asked to foot the bill for retirees from a state they don't live in. That would be the tipping point in the US.
DB plans are unaffordable - basically there is too much risk for any entity to take on. Backing by the government does not solve the problem (it just puts future generations at risk). With increasing life spans it is almost impossible to save enough of a country's production to fund retirement at 65.
The retirement age was set at 65 at a time when only 1% of the population lived to that age (1880's Germany). We need to realize that the solution to retirement funding is to extend ones working life (probably on a part time basis). Making this a more attractive option would do far more to solve the coming crisis than anything else.
If people want to retire at 65 then they need to save for it. Most people though are unwilling or unable to do so - so let's make the other option (work after 65) a feasible one.
Reforming the pension system is more like trying to reform the laws of mathematics. There is no asset class that will allow everyone to pay in 200K over the course of a lifetime and withdraw $3m in benefits during retirement.
For one of those damm'd Socialists', you're extremely optimistic. Except for this snippet which slid in, precisely what, is implied by 'let's not waste this opportunity to reform Pensions' ? ah, on the bright side neither 'the opportunity' nor the reform need be mutually exclusive. ...as a thing.. if Demographics and assoicated income, and Insurance industry sustain ability models were to be used as the foundation of the financial architecture, what role would the stock market play? And how does that jibe with what's going on now? It could be a really naive question. Butisn't the stock-market propping up all those 'institutional investors' right now?.. would reform plans on the table initiate a crash?
The only cure is for every person to score a public sector gig. Leo, you're talking about Canada - government spending under a conservative government has exploded - Ontario is the train wreck of North America - the Canadian housing market has yet to correct (at least by 30%) why would anyone expect anything other than talk from government minions (who have their gold plated plans). Tax policy encourages gambling over capital accumulation - the savers are punished. Since speculation is government sanctioned and encouraged - how can a private sector individual accumulate enough to match even the lowest public sector plan. I can't afford my government (4 levels) any longer but don't expect any solution - I'm saddened for the situation my children will find themselves in
Being ready and being able are light years apart.
Meanwhile Pat Quinn (ILL-inois) voted to extend pension age limits..
haha
work till you're 95 is doable :)
After that, it's time to start to enjoy life!