This page has been archived and commenting is disabled.

A Crisis in the Making?

Leo Kolivakis's picture




 

Submitted by Leo Kolivakis, publisher of Pension Pulse.

On Monday, the Montreal Gazette published its first of three editorials, Pension anxiety: a crisis in the making:

Christmas is over, and Boxing Day, too, and grim reality will return with the mail: credit-card bills and other evidence of our recent financial folly. New Year's Day will open RRSP season, when we're urged to invest for retirement.

 

There's a new anxiety about retirement in many Canadian households. After the investment tumult of the last couple years, Canada's greying population is coming to realize that "the golden years" may be turning to dross.

 

Today, we begin a three-day series of editorials on Canadians' pensions. Below, we outline the problem. Tomorrow, we'll look at some proposed remedies. And Wednesday we'll suggest where the national debate should go from here.

 

Typically, Canadians have three sources of money for retirement: government pension, workplace pension and private savings. But government pensions are not generous, workplace pensions cover too few of us, and private saving just isn't happening:

 

Government: For 2010, maximum payments under the Canada or Quebec Pension Plan plus federal Old Age Security will be under $1,500 a month.

 

Workplace: 11 million Canadians in the private sector do not have company pension plans. Among those who do, "defined benefit" plans, which put investment risk mainly on the employer, are dwindling away. One recent survey said 59 per cent of employers plan to reassess pension costs, and 43 per cent hope to reduce costs for retiree health benefits.

 

Private: Canadians use less than 10 per cent of the total "room" we have to invest in Registered Retirement Savings Plans, although RRSPs allow us to save on income taxes while saving for retirement.

 

Canadians are outliving our pensions. Life expectancy at birth, 77.8 years in 1991, is now 81.9 for men and 85.1 for women. Each year now, a lower proportion of Canadians will be working and paying into the Canada and Quebec Pension Plans, and a higher proportion will be retired and drawing money. By 2030, one-quarter of Canadians will be 65 or older. Something will have to give.

 

Fortunately, those who monitor these things - actuaries, union officials, professors, some politicians - are coming up with various ideas about how to deal with all this.

But our political leaders are less than eager to wade into this swamp. Meeting in Whitehorse this month, Canada's finance ministers accepted a report from prominent economist Jack Mintz, who said Canada's pension system is working fine. It's a view only an actuary could love: Mintz conceded that over half of private-sector workers lack employer-backed pension plans. The finance ministers just shrugged. "It's certainly not a system in crisis," said Ontario's Dwight Duncan.

 

They gave less credence to another report, commissioned by Duncan, which warned again about private-sector workers without company pensions, and said a "significant minority" of middle- and even upper-class workers will find themselves much poorer in retirement.

 

No crisis? If it's not a crisis, it's at least a problem growing toward crisis status. Tomorrow, we'll look at some of the proposed solutions.

On Tuesday, the Gazette published the second editorial, No shortage of ideas on how to fix pensions:

Yesterday we outlined the dark clouds gathering around the pension prospects of Canada's aging workforce. Today we'll survey some of the numerous proposals coming from all sides.

 

In a field with little consensus, one point goes unchallenged: Governments don't have money to sweeten the pot. With tax revenues down and deficits up, governments may change the rules on pensions, but funding will have to come from employers and employees, not taxpayers.

 

This being Canada, the provinces and Ottawa will have to co-operate on nationwide reform. As it happens, the governments of British Columbia and Alberta have been leading the charge for a new layer of pension plan. They, and to a degree Saskatchewan, are in loose agreement on finding a way to top up Canada Pension Plan payouts for those who choose - this would be voluntary - to pay more during their working years.

 

In Ottawa, Liberal chief Michael Ignatieff, often criticized for policy vagueness, has issued clear proposals for something similar, a "Supplementary Canada Pension Plan" through which people could "voluntarily invest extra funds in our trusted national pension."

 

Ignatieff adds two other proposals: that workers whose pension money is "stranded" by a corporate bankruptcy could have that money managed through the CPP; and that those on corporate long-term-disability pensions should be given preferred status as creditors in any bankruptcy.

 

Union leaders are calling for even stronger protection for private-sector workers' pensions imperilled in a bankruptcy. It's a hot issue: Many former Nortel employees, for example, are awaiting a sharp cut in pension payments; a nasty shock when you're, say, 75.

 

Finance Minister Jim Flaherty recently proposed some such improvements, but they would cover only federally-regulated industries, roughly seven per cent of all private-sector workers. Ontario has taken some steps in this direction, too.

 

Some union leaders want the government to just increase existing pensions. Paul Moist of the Canadian Union of Public Employees, for example, wants C/QPP benefits - and the payroll deductions and employer contributions that pay for them - to be doubled, over a multi-year phase-in period. This is the New Democrats' position, too. Since 93 per cent of employed Canadians pay into the plans, this would be an efficient way to offer better benefits to almost everyone, he says. And the CPP has the advantage of being actuarily stable at least into the 2080s.

 

The financial-services industry - the companies vying for your RRSP money and the ones which run pension plans for companies - have reacted as you might expect to the idea of a bigger government role. The Investment Funds Institute of Canada, for example, want changes in employer-sponsored pension plans and RRSPs to make these private vehicles more attractive to individuals and companies.

 

In other words, they want to hold onto their share of the pie. The Canadian Bankers Association says "the savings system in Canada is not broken and there is not a pressing need for a new one-size-fits-all retirement savings program." Sun Life Canada president Dean Connor proposes that unrelated employers be allowed to band together in big new private pension programs with group RRSPs and automatic enrolment, with an opt-out clause. While the CBA is resisting a "one size fits all" federal initiative, Connor warns against the provincial plans B.C. and Alberta are considering, calling them "a patchwork quilt."

 

Meanwhile the Financial Advisors Association of Canada says an improved CPP/QPP and private-side improvements may both be needed. Other people propose tax changes - more generous RRSP rules, say - to encourage people to save individually for retirement.

 

There is, then, no shortage of ideas on what to do about pensions. Tomorrow we'll offer our own thoughts.

On that famous Jack Mintz report, please read Jim Murta's actuarial blog where he recently went over the report in great detail. Jim concludes:


So, the conclusion is that “overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.” This is only true if the value of the owner-occupied home is included as an asset. This explains most of the gap in understanding between Dr. Mintz’s report and the views of Canadians. As a policy paper, this one is not of much help. There are too many guesses and assumptions. What is needed is a comprehensive longitudinal study, one that traces what actually happens to retirees’ incomes.

Another expert, Bernard Dussault, Senior Research and Communications Officer at the National Association of Federal Retirees, and the former Chief Actuary of Canada, shared these thoughts with me following the Whitehorse meeting:

 

Two years ago, four provinces were most concerned with serious pension issues and launched 3 provincial commissions.

 

Last year, the federal government was much concerned with similar pension issues and launched two series of consultations.

 

Through the Jack Mintz's and the Bob Baldwin's reports, these 5 governments are now being told that the status quo is an option. I look forward to see how these governments' reaction. Here is mine.

 

Both reports refer to Statistics Canada's figure to the effect that the rate of poverty among Canadian is only 4%. But neither report refers to the GIS take-up rate of 35%. Yes, 35% of Canadians over age 65 receive a GIS benefit.

 

A perhaps surprising extreme example of such recipient is a person receiving the maximum CPP retirement pension (about $11,000) and the OAS benefit (about $6,200) but no other income. That person is entitled to a GIS benefit of about $1,500 (i.e. 50% of the difference between about $14,000 and $11,000). Disregarding any provincial GIS supplement, as the case may be, e.g. Ontario's GAIN program, this person's total retirement income therefore amounts to about $18,700. As this is about the threshold of poverty for someone living in a large municipal area, this extreme case is at the verge of falling (if not already already) in the category of poor persons. As most cases are not extreme cases, the poverty rate is in all likelihood much closer to 35% than 4%.

 

Obviously, the status quo is always an option, but the recognition of the reality of poverty is not.

 

I went over some of my thoughts on the Canadian pension debate roughly two weeks ago. With all due respect to Jack Mintz, I'll take the expert opinions of Jim Murta and Bernard Dussault over his on the pension crisis. If politicians prefer to avoid discussing this issue, they're only delaying the inevitable and mark my words, this issue will come back to haunt them.

***UPDATE***

On Wednesday, the Gazette published its third editorial, Pension woes won't be easy to fix, stating that the problem isn't in public pensions but private pensions. I beg to differ. The pension crisis may touch the private sector first, but it's only a matter of time before it reaches the public sector. Importantly, if we don't fix the major governance gaps at the large public pension plans, another disaster similar or even worse than 2008 will occur. When it comes to fixing pension woes, tough political decisions will need to be taken and stakeholders need to significantly improve the governance at  major public plans.

Also on Wednesday, Daniel Leblanc and Bill Curry of the Globe and Mail report that Ottawa targets public service pension plan for cutbacks. A proposal is circulating to put an end to early-retirement provisions for new hires:

The Conservative government raised the possibility this month of going after the bureaucracy's pension plan as it looks for ways to deal with a ballooning deficit.

 

But senior civil servants are also concerned that too many bureaucrats retire in their mid-50s, causing staff shortages that are set to worsen in coming years.

 

Any major change to the Public Service Superannuation Act, however, will be stiffly opposed by unions, which are trying to contain the growing criticism of their members' plans in an era of dwindling private-sector pensions.

 

One of the most controversial aspects of the federal pension plan is the ability to retire with a full pension at age 55, after 30 years of service.

 

Federal officials expressed concerns that the provision is “reducing the pool of staff with experience,” with half of the executives in government eligible to retire by 2012.

Want to take a stab at which issue will become the next politcal powder keg in Ottawa and around the world?

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 12/31/2009 - 03:25 | 178666 Anonymous
Thu, 12/31/2009 - 03:25 | 178665 Harbourcity
Harbourcity's picture

What's the big deal?  Canada's national GDP is probably less than the Xmas Bonus given to the guy in the mailroom at Goldman Sach's.

 

Wed, 12/30/2009 - 22:29 | 178547 Anonymous
Anonymous's picture

It's not complicated. Either we cut benefits and promises or we create inflation.

The younger generations will have time to adapt their expectations and lifestyles but no matter what, the boomers are screwed and most don't know it yet.

We're going from 5 workers per dependant to 2.3. They'll have to be careful not to bite the hand that feeds them.

Wed, 12/30/2009 - 15:59 | 177930 Leo Kolivakis
Leo Kolivakis's picture

Also on Wednesday, Daniel Leblanc and Bill Curry of the Globe and Mail report that Ottawa targets public service pension plan for cutbacks. A proposal is circulating to put an end to early-retirement provisions for new hires:

The Conservative government raised the possibility this month of going after the bureaucracy's pension plan as it looks for ways to deal with a ballooning deficit.

 

But senior civil servants are also concerned that too many bureaucrats retire in their mid-50s, causing staff shortages that are set to worsen in coming years.

 

Any major change to the Public Service Superannuation Act, however, will be stiffly opposed by unions, which are trying to contain the growing criticism of their members' plans in an era of dwindling private-sector pensions.

 

One of the most controversial aspects of the federal pension plan is the ability to retire with a full pension at age 55, after 30 years of service.

 

Federal officials expressed concerns that the provision is “reducing the pool of staff with experience,” with half of the executives in government eligible to retire by 2012.

Want to take a stab at which issue will become the next politcal powder keg in Ottawa and around the world?

Wed, 12/30/2009 - 13:30 | 177846 Anonymous
Anonymous's picture

So you want a Canadian version of the 401K Ponzi?

Wed, 12/30/2009 - 13:15 | 177829 Anonymous
Anonymous's picture

Three things :
1) owning a home outright
2) medical care
3) money to live on

In Canada, basic health care is free. Medical technology continues to improve.

Money to live on : this is the pension payment that builds up the money that pays out a minimum living standard.

Owning a home outright. This is a whopping upside for anybody. And this is where the system breaks down.

For young people : Why not have the government collect the pension money over the year and then apply it annually to the principal of your mortgage (up to the value of an average house - about 250 - 300 K)?

Using the money this way would ensure that younger people would quickly be in the position of owning their primary residence outright. After that, the money is just paid into the pension plan like it is now.

The impact of this plan is more than you think. By quickly reducing the principal on the primary residence of a young person you reduce their lifetime interest payments by hundreds of thousands of dollars.

So, at a young age everybody in Canada would own their primary residence outright. Everybody in Canada already gets pretty decent medical care for free (and the system is improving rapidly now). Last but not least, the CPP would still exist to ensure a guaranteed income (paid for by contributions).

Company pension plans could do the same thing (use money to pay down the principal of mortgages) as a fine incentive in hiring. The problem : they use the pension money of their employees to guarantee their bonds. In other words, the way the system is designed, companies have a tremendous incentive to promise the world in pensions to keep their workers docile and then go bankrupt, strip assets, give the schlop a new name and to hell with the workers.

Just some ideas for the collective brainstorming.

The banks would fight it tooth and nail. They would "lose" billions in interest payments and the wage and debt slaves would be so much harder to keep docile. To heck with the productivity and real wealth creation potential of capital, huh?

all the best from

Namke

Thu, 12/31/2009 - 03:27 | 178667 Harbourcity
Harbourcity's picture

As long as you prevented the young people from remortgaging their home and liquidating their locked in pension so they can go buy another home...

 

Wed, 12/30/2009 - 12:12 | 177763 masterinchancery
masterinchancery's picture

ultimately all pensions that are not fully funded and in the possession of the pensioner, must be paid for, in some fashion, by the productive efforts of the rest of the population. No scheme can escape this fact.  Raising taxes will simply drive the most productive Canadians to other countries or early retirement.  Hence, pension levels will be forced to adjust to reality, either explicitly or through the subterfuge of inflationary money printing.

Wed, 12/30/2009 - 12:28 | 177772 Anonymous
Anonymous's picture

Perhaps the real problem is that underfunded pensions exist in the first place. After all, there's no reason why the sponsor companies couldn't have fully funded their plans from the beginning; except, of course, that this would have eaten into their profits and given an accurate representation of their true profit/loss....

Wed, 12/30/2009 - 11:53 | 177741 Anonymous
Anonymous's picture

One issue to consider regarding the use of the home equity as source of funds in retirement years is the potential for the home to lose value or be difficult to sell at an acceptable price in the coming years due to the following reasons:

1. Older folks may have deferred maintenance, thereby increasing the costs of the future buyer and decreasing the potential selling price of the home;

2. Property taxes may be higher in the future, thereby potentially lowering the amount of income available to service a mortgage (and thus, lower the price that could be paid for the home).

3. Interest rates may be higher in the future, thereby lowering the amount the home can be sold for because the price of the home, in an environment where most people buy with a mortgage, is a function of monthly income available to use towards the mortgage: if mortgage interest is at a higher rate, more of the monthly payment will go towards the interest and less be available for the principle, thus likely lowering the amount that can be paid for the home (and monies for the seller), and;

4. Finally, with so many boomers and relatively fewer and comparatively more heavily indepted at their peak home buying period Generation Xers and Yers, there will be less demand for homes going forward - the early movers may sell at a good price, but I would not like to be a 55 year old counting on selling for a good price in 10 years.

These are just some brief musing on an important topic related to pensions - if one leg of the stool is savings, and that leg is very short, the seat old folks hoped to have in their twilight years is certainly going to be wobbily.

Peterpaul in Atlanta

Wed, 12/30/2009 - 11:50 | 177738 Leo Kolivakis
Leo Kolivakis's picture

On Wednesday, the Gazette published its third editorial, Pension woes won't be easy to fix, stating that the problem isn't in public pensions but private pensions. I beg to differ. The pension crisis may touch the private sector first, but it's only a matter of time before it reaches the public sector. Importantly, if we don't fix the major governance gaps at the large public pension plans, another disaster similar or even worse than 2008 will occur. When it comes to fixing pension woes, tough political decisions will need to be taken and stakeholders need to significantly improve the governance at  major public plans.

Wed, 12/30/2009 - 12:01 | 177750 phaesed
phaesed's picture

The PBGC is perhaps the second biggest con of all time, behind the banking sector & our own Fed. They also pay their actuaries diddly-squat.

Private pensions are a problem because they can offload the burden to the public during a bankruptcy process, so you're absolutely right, if it starts private, it becomes public.

Wed, 12/30/2009 - 11:22 | 177709 Anonymous
Anonymous's picture

Where have all our savings gone?
-Long time passing?
Where have all our savings gone?
-Long time ago?
Where have all our savings gone?
-Military industrial Wall Street bankers every dime.
When will we ever learn?
Oh, when will we ever learn?

Wed, 12/30/2009 - 22:29 | 178548 Anonymous
Anonymous's picture

the money is gone.

most was spent on cocaine and strippers and condos in the Cayman Islands.

http://www.youtube.com/watch?v=u875UoZHEaw

Wed, 12/30/2009 - 10:59 | 177693 Anonymous
Anonymous's picture

How unlike LK to be... realistic.

Wed, 12/30/2009 - 10:56 | 177688 zobes
zobes's picture

"...but funding will have to come from employers and employees, not taxpayers." Ummmm, say what?

And with all due respect to the contributor, and I mean with all due respect... The last line about how this will come back to haunt the elected officials doesn't ring true to me. What is the worst thing that will happen to the elected officials who turn a blind eye to any issue, in Canada or the US? They won't get re-elected. That is not a sufficient punishment. They should be hauled up in front of cameras and questioned for days on end, much like they do to private sector business people. Even better, any elected or appointed government official who doesn't do the right thing for the people should be stripped of their golden parachutes and forced to earn an honest living like the rest of us. <Angry rant complete>

Wed, 12/30/2009 - 10:30 | 177673 Anonymous
Anonymous's picture

The Canadian Social Security sounds just like the intergenerational Ponzi scheme that ours is.

Wed, 12/30/2009 - 10:30 | 177671 phaesed
phaesed's picture

In the short term, US Treasurys are oversold because many investors have negative sentiments regarding the US bond market, while stocks are overbought, Faber said.

"I believe that we could have a rebound (in Treasurys) for, say, one to three months," he said.

But longer term, Treasurys prices are likely to come down.

http://www.cnbc.com/id/34629327/site/14081545

 

*yawn*

I think I'm becoming the Treasury basher basher

 

Makes me think of "The Big Hit"... I bust you with the trace buster buster buster!

Wed, 12/30/2009 - 10:17 | 177661 Anonymous
Anonymous's picture

Leo - here's an idea. Why not pressure your government to sell gas to you at what we pay for it in the US since we import your gas?
You Canucks are getting ripped off. With the savings in gas prices, your economy would soar and would help bridge the retirement gap.

Wed, 12/30/2009 - 10:07 | 177650 Winisk
Winisk's picture

I'm curious why the equity in a home is not relevent in this discussion?  I'm guessing that most pensioners have a mortgage free home that can be used to provide a substantial source of funds for the twilight years. 

Wed, 12/30/2009 - 10:27 | 177667 Reggie Middleton
Reggie Middleton's picture

I'm curious why the equity in a home is not relevent in this discussion?  I'm guessing that most pensioners have a mortgage free home that can be used to provide a substantial source of funds for the twilight years. 

Not if you can't get a loan or sell your house!

Wed, 12/30/2009 - 11:52 | 177737 WaterWings
WaterWings's picture

I'm not in the business, RM, but a pensioner in a 100% equity home could still get a small HELOC or even reverse mortgage, no? And if they wanted to sell they would just need to compete with local foreclosures, yes?

Maybe this goes without saying, but what's your take? Are there any figures on pensioners cashing out 401k, house, etc and moving in with kids? It would seem that the only people that can get a loan are the '20% downpayment with good credit' type - and who, in general, has that kind of cash except our seniors? So who exactly is buying a home these days when you can rent and wait for the bottom?

Wed, 12/30/2009 - 11:40 | 177680 Winisk
Winisk's picture

Point taken.  The situation isn't as dire in Canada (yet?).  I know a few seniors who have chosen to sell and move into smaller homes, which had more to do with failing health than finances, but the strategy of selling the family home was available to them.

Thanks for keeping the big picture in focus.  I think your point should be taken into consideration when discussing pension reforms since the bulk of most people's savings is stored in the home. 

Wed, 12/30/2009 - 10:07 | 177648 curbyourrisk
curbyourrisk's picture

LEO:  Do you know if all the Companies here in the states still have to have all their underfunded pensions.....fully funded by 2011?  I thought the FASB passed something a while back requiring this to happen?  At this point (if it is the case) not too many public or private companeis can do this.  I have tried to get this answered other places and no one has answered me.

 

Thanks Leo....for all your reporting.

Wed, 12/30/2009 - 09:54 | 177642 Anonymous
Anonymous's picture

Leo - here's an idea. Why not pressure your government to sell gas to you at what we pay for it in the US since we import your gas?
You Canucks are getting ripped off. With the savings in gas prices, your economy would soar and would help bridge the retirement gap.

Wed, 12/30/2009 - 07:56 | 177579 Uros Slokar
Uros Slokar's picture

Thanks, I'll be certain to pass along this depressing news to anyone I know who is even thinking about retirement. I'll also be interested in talking to my uncle who works in the Premier's office to see what he has to say about this issue from the perspective of little ole' PEI.

Wed, 12/30/2009 - 07:56 | 177578 exportbank
exportbank's picture

Leo.. Thanks.

Pensions and health care are the giant icebergs lurking just in front of us. CPP is blowing up its asset base with junk investments in far away places. There is no solution "Murphy's Law" (what can go wrong will) - suits pension issues so well. Of course every money manager wants his piece of what is a giant pie but in reality the only thing every pension manager has done (everywhere, every time, every situation) is deliver a great pay packet to themselves and crap returns to the plan. 

Wed, 12/30/2009 - 02:12 | 177506 Chopshop
Chopshop's picture

thanks for sharing your thoughts on the pension issue, Leo. always well-written and enlightening.

when do the big boyz like the ontario gov't / public / school pension system(s) have their allocation committee meetings ?

are they April / May / June like their US counterparts ??  thanks in advance for your help.

Wed, 12/30/2009 - 17:43 | 178257 Leo Kolivakis
Leo Kolivakis's picture

From my recollection, big boys have asset allocation meetings once a quarter or as need be. They move very slowly.

Do NOT follow this link or you will be banned from the site!