January 21, 2011
Why We Need a Real Public Pension Plan
We are facing the biggest retirement wave in Canadian history. Over 13% of the population is 65 or older. This will double in 2025 to 25.5%. But our pension system is failing.
Less than half of retirees have a workplace pension, and only one third have a defined benefit, i.e., a guaranteed fixed amount, or true pension. Other pensioned retirees have defined contribution pensions where the worker pays into a fluctuating market savings plan, with no matching employer contributions.
The majority of retirees will have to rely on the Canada Pension Plan (CPP) and personal savings. But one third of all Canadian workers have no savings. Only 31% of the workforce contributes to the main retirement savings vehicle, Registered Retirement Savings Plans (RRSPs). For those who can contribute, the median value of RRSPs for workers approaching retirement is $60,000. This amount, at current interest rates, amounts to an annuity worth $3000 per year.
It gets worse. The peak year for workplace pensions was 1977. Since then, both public sector and private sector pension coverage has declined, from 87% to 84% in the public sector and from 36% to 25% in the private sector.
The decline of private sector pension coverage is especially threatening, as the private pension system is meant to be the chief source of retirement income for the majority of Canadian workers.
What remains of private sector pensions is imperiled. As profit rates declined in the 1970s, private pension managers moved into riskier investment strategies. In the 1990s this appeared to work with high returns, though Companies tended to take surpluses or give themselves premium holidays (which is why unions fight for joint trusteeship of pension plans). Since 2000, and especially with the 2008 credit crisis, returns declined sharply.
In 2010, private pensions were under funded by 26%. In some cases where companies have entered bankruptcy (like Nortel), courts have ruled that creditors come before pensioners in taking whatever assets remain.
Even public sector pensions have suffered with declining market returns as retiree benefits have been reduced or eliminated, and inflation indexation has been capped.
But the government, as Finance Minister Jim Flaherty made clear at December’s 2010 Federal-Provincial Finance Ministers conference in Whitehorse, isn’t about to help. Instead the Conservatives will roll out another private savings vehicle, the Pooled Retirement Savings Plan (PRSP) for employers without pension plans, without employers having to contribute, and subject to finance industry management fees.
Given the failings of defined contribution plans and market savings approaches, the PRSP will in no way address the coming pension crisis. But if we expand the public pension plan we can.
A Flawed Design
Financial planners recommend that retirees should have 70% of pre-retirement income. As a proportion of the median individual income, $47,200, this means $33,000 per year. Can this be done with our current pension design?
Canada’s pension system is made up of public and private parts, with private pensions and savings (such as Registered Retirement Savings Plans – RRSPs) meant to be the larger part.
The basic public pension is the Canada Pension Plan (CPP), or the Quebec Pension Plan, which is supplemented by Old Age Security (OAS) and, for impoverished seniors, the Guaranteed Income Supplement (GIS).
The CPP was designed in 1966 to provide 25% of pre-retirement income - about one third of post-retirement income. On the positive side, the CPP is a guaranteed benefit pension. That is, a definite amount will be paid; this amount is inflation indexed to maintain its value; it is portable across Canada; and age and gender neutral – unlike private savings plans which discriminate against the healthy, especially women who live longer than men, and the unhealthy if prior medical conditions are identified.
Unfortunately, most workers will never achieve 25% of pre-retirement income from the CPP. The CPP is contribution based, i.e., workers and employers pay premiums (currently 4.95% of gross income) and experience rated, that is, retired workers collect based on actual work histories. Few workers work continuously. Therefore, few ever achieve the maximum 25% service or $11,000 a year. In fact, the actual average amount of CPP collected is $6000 per year. But, at least the CPP is a defined benefit and could be improved to industry norms like a pension based on your best five earning years.
Old Age Security, which all Canadian workers are entitled to, if you make less than $64,000 per year, only amounts to $6000 per year (which, revealingly, gets you to the seniors’ poverty line with CPP).
One can only access the Guaranteed Income Supplement if you fall below the $12,000 per year poverty income line, though, tellingly, one third of seniors do qualify.
The public pension system from the 1960s, then, is really a poverty prevention strategy (like the original 1927 means tested old age allowance), not an income replacement plan.
Yet the private pension system, which should be generating two thirds of the required 70% pre-retirement income, is failing to an even greater extent – since the vast majority of Canadian workers can’t afford a private savings approach to retirement.
So our mixed pension model, of mostly private savings with a public pension setting a poverty line floor, is failing in every private interest and public policy sense: in meeting the $33,000 income replacement goal; in protecting consumer purchasing power - the largest component of market spending – when one in four Canadians will soon be seniors; and in undermining public revenue collection by $18 billion a year with tax shelters for wealthy savers.
A Doubled Canada Pension Plan
The reality for the vast majority of Canadian wageworkers is that we need a real public pension system.
This is why, the Canadian Labour Congress, and many pension experts, argue for a doubled CPP, to replace 50% of pre-retirement income. This would generate a majority of post-retirement income in the most low cost and secure manner for the vast majority of workers who can never afford an individual savings approach to retirement.
The CPP can be doubled easily. The administrative machinery is there with 93% of Canadians enrolled. Premium increases can be gradually phased in over a lengthy period to minimize economic disruption: as in an increase in payroll tax rates – handled successfully with the near doubling of CPP rates, from 1997-2003; in preventing young workers reaping a windfall (since doubling will only take place over a long period of time) and with older workers receiving an adjustment (before actual doubling has taken place).
A public pool is also much cheaper to administer. While RRSP and other private savings vehicles charge administration fees of 2% or more per year, the CPP Investment Board only charges 0.16%.
In fact, if the CCP was raised to replace 60% of pre-retirement income, the OAS could be eliminated and GIS benefits to the poorest seniors could be substantially raised.
With an expanded CPP, the CLC also argues that private pensions need to be publicly insured. Ontario since 1980 has had a pension insurance system that guarantees a basic pension floor of $12,000 per year.
In effect, we need to nationalize the pension industry.
Or To Work Longer?
From a Conservative point of view, including the Ignatieff Liberals who support the PSRP, any public economic venture that could affect business investment confidence such as finance industry interests, provincial government interests of local elites, or increase organized workers’ confidence, is to be shunned.
The Conservative answer to our growing pension dilemma is not to nationalize the failing private pension industry, but to make us work longer.
Mandatory retirement at the age of 65 has virtually disappeared (though the law allows private insurance carriers to cut off benefit coverage at the ‘normal’ age of retirement) and the CPP has been amended to further penalize early retirees and to reward people who work to 70. By 2016 we will receive 36% less if we retire at 60 and earn 42% more if we can go the distance. Even RRSP rules have been changed to allow us to keep working and contributing until we are 71.
While it is important to end age discrimination, it is also important to recognize physical and economic realities. The average age of retirement is 61, not 71.
Work should be a creative and fulfilling part of our lives. But under capitalism work is alienated and treated as a commodity to be used up and paid for as cheaply as possible. That is why people choose to retire at 61, even if their pension isn’t worth much, and why they are forced to re-enter the workforce, usually at a cheaper rate.
A real public pension plan would allow for a humane economic choice about a mix of retirement and work – or retirement alone.
Debate and Struggle
As we get older and have put in a lifetime of contributory work, we should have a right to a secure and dignified retirement. Ironically, even by market criteria, a real public pension plan is the only path to both economic efficiency and social goals – if we can treat each other as more than profit making commodities.
But as Marx shows in Capital, the market knows no sentiment. Valuing a person in wages, by their ability to meet the market criteria of socially necessary labour time – if we are employed – is what counts. But the purchasing power of wages, and levels of unemployment, has essentially been stagnant since the 1970s. This is why two income families and soaring personal debt, with a consequent inability to save, has occurred.
Getting a real public pension plan, therefore, will be a matter of struggle, not just reasoned arguments.
A new party in Canada: Québec Solidaire and the resistance
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