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Staving Off the Pension Crisis?
John
Crocker, President & CEO of Healthcare of Ontario Pension Plan
(HOOPP), writes in the Toronto Star, Staving
off the pension crisis:
Canada is headed
for a retirement income crisis. The last 20 years have seen a steady
shift of retirement income risk from employers to workers, and studies
show Canadians are not saving enough for retirement on their own.
According to experts, you need about $20
of savings for every dollar of retirement income you want to receive.
So if you seek an income of $50,000 a year, you need to save $1
million. If you want $25,000 a year, you need $500,000. Yet the average
Canadian has only about $60,000 in his or her RRSP at the time of
retirement. RRSPs simply aren’t working for most Canadians.
As
a result, I worry that as a country we are undoing decades of success
at raising the standard of living for retired people and shrinking the
scourge of elderly poverty.
Canadians
share my concern. According to research conducted for HOOPP this
month, 84 per cent of Ontarians are concerned about not having enough
money for retirement. And 58 per cent believe it is principally the
role of government — not individuals — to ensure Canadians have
adequate incomes in retirement.
The pension puzzle: The issue
is adequacy, not coverage
The magnitude of the problem is
clear. However, the best, and perhaps most obvious solution — the
defined benefit pension (DB) plan — is being overlooked or prematurely
dismissed.
My experience at HOOPP has convinced me that
defined benefit plans are viable, affordable and must be an integral
part of providing retirement income security for Canadians in both the
public and private sectors. Our members are not the rich of society.
They are the nurses and other working people who provide us with health
care. Yet they have peace of mind while working — and a decent
standard of living while retired — because they have an annual
retirement income that is both adequate and reliable.
Recent
years have seen a shift to defined contribution (DC) plans, where
employees are responsible for choosing their own investments, with no
promise of exactly how much will be there for them upon retirement.
Despite the significant downside for employees, DC plans have become
popular among employers due to the perception they are more affordable.
It’s time to debunk the affordability myth. A 2008 study by the
U.S.-based National
Institute on Retirement Security found that DB plans are more
affordable than DC plans, assuming the same pension payout. In both
types of plans, the inputs from employer and employee are the same, but
DB plans yield pension results that are three times or more those of a
typical DC plan because DB plans have professional investing, pooled
longevity risk, and are ageless — designed to run over the long term.
With a DC plan, the employee pays just as much in contributions —
as does the employer — as they would in a DB plan. The core issue is
the adequacy of the pension that is offered.
A typical DB plan’s goal is to provide
replacement income equal to 67 per cent of working earnings. There’s no
such target for a DC plan. They typically generate a pension of about
20 per cent of working earnings.
More DC plans, or their
variants, may solve a narrowly defined “pension coverage” problem in
Canada. But if one is looking to solve the retirement income crisis
that looms ahead, DC plans will not cut it. Well-run defined benefit
pension plans will.The solution: Enable multi-employer
private plansThat is why I am calling on governments to
enable the formation of large, multi-employer defined benefit pension
plans to provide pensions for workers in the private sector.
These funds could be set up either by sector,
industry or region. Employees would contribute up to 10 per cent of
their salaries to the plan, and employers would match their
contributions.
The multi-employer model provides a number of
significant advantages. The liability would not be carried on any one
company’s balance sheet, making participation more attractive for
private corporations. No longer would the full weight of funding be on
one set of corporate shoulders. The most important would be meaningful
replacement income for every employee upon retirement — not a process
where the employee is left on his or her own.
There are two
public policy barriers that must be overcome. First, government must
change pension funding rules that allow employers to stop contributing
when times are good, thus creating problems when the economy worsens.
Second, we must abandon the use of “point-in-time” accounting for
valuations of pension plans. While plans are designed for the long
term, the use of this “snapshot” approach can lead a plan to be found
insolvent even when it can pay everyone their entitled benefits. Yet
the plan must still “fix” the solvency — spending time and effort on an
artificial, technical problem.
Providing every citizen with a
livable retirement income will be critical to both Canada’s prosperity
and our social cohesion in the 21st century.
The good news is that the solution is in our
grasp. Governments must act now to get the rules right, and to show
leadership in encouraging the development of new multi-employer DB
plans to serve more Canadians.
Together, we need to fix our
pension system so that it looks after the retirement income needs of
our citizens. If we focus on the right issue — adequacy — we can build a
sustainable retirement system that makes sound business sense, while
meeting allowing Canadians to retire with dignity and independence.
Mr. Crocker is absolutely right on
the benefits of DB plans. Of course, HOOPP is a private DB pension plan,
which is why he is calling on governments to enable the formation of
large, multi-employer defined benefit pension plans to provide pensions
for workers in the private sector.
But what if we were able to
offer every Canadian an affordable public defined benefit pension plan?
Why not allow private companies to focus on their businesses and leave
pensions in the public domain? Companies can still contribute part of
the money but they would be offloading the risk of a pension deficit -
or worse in the case of a bankruptcy - to the federal or provincial
government.
I am tossing ideas out here. Sure, some companies
like CN might refuse because they're happy with the way their pensions
are being managed, but most other large companies would probably jump on
the idea of offloading their pension risk to a universal public pension
plan.
If this idea is too radical, then I am all for large,
multi-employer defined benefit pension plans to provide pensions for
workers in the private sector. Again, we need to make sure these plans
are well governed, but this idea also has merits.
It's just that I
prefer pushing the envelope even further than Mr. Crocker and saying
that pensions need to be a public good, much like we treat healthcare
in Canada. There will always be a private system but the dominant system
providing pensions for Canadians should be public.
This is my
ultimate vision for improving our pension system and I believe we have
the collective resources and brain power to achieve this social goal.
So let's get on with it. The longer we wait, the harder it will be to create a sustainable retirement system allowing Canadians to retire with dignity and independence.
***Find all my comments on Pension Pulse.
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RRSPs and DC plans are an abject failure. Period. We need to move past these failed options, leaving far too many people facing pension poverty, and create an affordable universal pension plan with realistic assumptions on investment returns, higher contribution rates, and increases in the retirement age. The traders here might be good at managing their own money, but the majority of the population are like lambs off to the slaughter in the new age of Casino Capitalism.
84 per cent of Ontarians are concerned about not having enough money for retirement. And 58 per cent believe it is principally the role of government — not individuals.
Yet the average Canadian has only about $60,000 in his or her RRSP at the time of retirement RRSPs.
So if I understand this correctly. Canadians are concerned about retirement but do a lousy job saving for it and they would rather the government make up the difference by forcing them to save more through forced contributions, which is considerably more than what they are able to save for themselves. The experts who designed the doomed pension plans think this is what we want and need. I think not. Canadians don't want higher forced contributions coming off their cheques every month. Many are scraping by as it is which is a more credible reason why we are not saving enough. Concerned people don't spend irresponsibly. Inflation is outstripping our ability to keep up. What they want is the government to miraculously make up the difference without it effecting them. Can't be done. I'm not surprised the experts, whose livelihoods depend on our savings, are concerned that we are not sending more of our money their way in return for false promises.
Defined Benefit plans are guaranteed to be disasters. Original participants will demand the guaranteed benefits even when funds are not available. Later retirees will find that the vault is empty and get nothing. The whole idea of some sort of guarantee of what a reward will be in 30 years is nonsense. What happens when the retiree continues to live to 105 rather than dying at the projected 85? They did not keep their side of the bargin and die.
Your quote from the "expert" simply shows that people are not saving enough. Look closely at the Chilean solution. Eventually everyone, workers and retirees, must adapt the spending and consumption to reality. The idea that reality can be avoided by hoping that someone later will make up for a shortfall in deposits or economic growth is simply nonsense. Making it multi-employer is simply an attempt to let someone else have to fund the deficits when the pot has been robbed by excessive benefits.
Where are the additional contributions to come from? In Ontario, the cost of electricity will go up by 35% this year (new 8% tax, 11% rate increase, new Green fee Plus a switch to "smart meters" = 35%+) property taxes are escalating and every fee and charge associated in any way with any level of government is skyrocketing. Couple this with stagnant wages, debt to income ratio of 147% and you have an economy that just doesn't seem able to save more for retirement. I also find "professional" when used with money managers a laughable term. Just because you find one fund that lucked out means squat in the greater picture. You can't address pensions until you've addressed excessive debt coupled with excessive government. Of course in Canada, if you've scored a government job, you're in the Royalty of world pensions.
Leo - keep on this issue - it's a tough one and that's the kicker - though issues are never fixed.
Leo, do pension plans Mark-to-Market or Mark-to-Model?
If that's not the definition of Big Brother & the Nanny State, I don't know what is.
Leo, is this an audition for your new job as stand-up comedian? At present, the landscape is littered with professionally managed pension funds that are on the verge of collapse. The core problem is that western economies are not sufficiently productive. The solution is to spend less, save more, and plough those savings into sound investments. And the only way to do that is for governments to return to sound money, start respecting the sanctity of contracts, and slash taxes.
Poorly managed DB plans in the US are directly due to irrealistic investment assumptions and poor governance. They need to be fixed and tough political decisions need to be made.
It is inconceivable that DB plans can ever have a place anywhere. By their definition they seek to provide certainty where there can be none. I find it an absurd notion and claim they are not a symptom but a cause of where we stand today for they allow vast numbers of idiots to ignore true and honest retirement planning. Personal responsibility and everyone taking their own real world risks is where we should be not some half baked, doomed to fail marxist nonsense.