Sorry, Canada, the U.S. has the better safety net

The fix for Canada's retirement system is going to come, in part, from borrowing from the American approach.

Have you been watching the American health-care fight?

Then you know that their health insurance system is a mix of government guarantees, private options and employer-funded plans that offer complete coverage to some — the poor, the rich, seniors, government  workers — but leave millions of others without a safety net.

Canadians may be surprised to know that, when it comes to pensions, Americans have a strong safety net. (iStockphoto)

And while many Americans have excellent health care through their employers, they're one layoff away from losing it. What's more, over the years employers have cut back on coverage so that many of today's jobs come with no health insurance at all. And that's not counting the growing ranks of the self-employed who have to fund health care on their own.

Ah, Americans. The more we watch them tearing themselves apart over health care, the more we want to give ourselves gold medals.

But before you get too smug, dear Canadian reader, consider this: The above isn't only a summary of American health care. It's also a pretty good description of Canada's imperfect retirement system.

Just replace "health insurance" with "pension." Too many Americans can't get proper health care? Too many Canadians don't have a proper pension.

The fix for Canada's retirement system is going to come, in part, from borrowing from the American approach. Why? Because the American system of government-sponsored pensions, known as Social Security, offers retirees bigger pensions than Canada's equivalent program, the Canada Pension Plan.

That's right: Their government-run retirement safety net is wider than ours. What's more, and perhaps less surprisingly, the Americans also do a better job of fostering private retirement savings.


There's a growing realization  that Canadians are not saving enough for retirement, collectively or individually, and a good number of us — at least a fifth by most estimates — run the risk of seeing our living standards drop when we hit retirement age.

Tony Keller has been an editorial writer, columnist and editorial page editor for The Globe and Mail; a columnist for the Toronto Star; managing editor of Maclean's; and editor of the Financial Post Magazine. He is currently a visiting fellow at the Mowat Centre for Policy Innovation.

In the coming days, Ottawa is expected to announce that it is starting public consultations on improving the pension and retirement system. The Harper government has been lukewarm to the idea of wholesale pension reform, but it is under growing pressure from the provinces, led by British Columbia and Alberta. Two years ago, they proposed the creation of a new supplemental national pension plan, and several other provinces have since signed on to the idea. (Full report - PDF)

This, remember, is how medicare came about in the 1960s. Keith Ambachtsheer, director of the International Centre for Pension Management at the University of Toronto's Rotman School of Management, even calls his version of the reform plan "Pension-care." (More - PDF)

Provincial and federal experts agree that we don't need to reinvent the retirement wheel. The way forward is to build on what's best about the existing Canadian framework: the CPP's guaranteed pensions and low-cost money management, and the encouragment of private savings through registered retirement savings plans (RRSPs), company registered pension plans (RPPs) and tax free savings accounts (TFSAs).

To improve what we already have, we should borrow from the U.S. approach: by offering an expanded national pension plan, coupled with more room and better tax treatment for private pensions and individual savers.

The result would be the world's best retirement system. Oh, and the cost to taxpayers would be approximately zero.

That's because this is not about today's workers subsidizing the already-retired. This isn't generational warfare. It's about people saving more for their own retirements. That's how CPP already works — your pension tomorrow is funded by your pension deductions today.


CPP is a well-funded, actuarially sound pension scheme. Polls show that Canadians worry about whether CPP will be there when they retire, but their concern is misplaced: it is the most solid of the retirement options.

It's also more solid than Social Security, in that it's a system where current workers fund their own future retirements, rather than relying on current workers to fund current retirees.

Under CPP (or Quebec's parallel QPP), employees have 4.95 per cent of their earnings deducted from their paychecks, up to the maximum insurable income of $47,200, which is the average full-time wage. Employers contribute an equivalent amount.

The more you contribute, up to the annual ceiling, the more of a pension you're entitled to.

If you've worked a full career earning the average wage or more, you can retire at 65 with a maximum CPP pension of $934 a month, an amount that rises each year with inflation.

You'll also get an Old Age Security payment of $517 a month, though it gets clawed back if you're in an upper-income bracket. The same goes for the Guaranteed Income Supplement, which is only paid to the poorest retirees.

As for U.S. Social Security, it has a higher payroll deduction rate (6.2 per cent of wages), a higher maximum insurable income ($107,000 US) and therefore offers considerably higher benefits.

For example, the top Social Security payout in the U.S. at age 65 is currently $26,292 a year whereas the CPP maxes out at $11,208.

Nest egg

The Canada-U.S. comparison exposes the CPP's only real flaw — it's great as far as it goes, but it doesn't go far enough.

Most experts say you'll need an annual income worth 60 to 70 per cent of your former working wage to maintain roughly the same standard of living. For most Canadians, CPP meets only a small fraction of that requirement.

Say you earn $85,000 a year. When you retire at 65, the maximum CPP and OAS pension you can receive is $17,400 a year. If you're aiming for 70 per cent of your pre-retirement income, you're short $42,000.

If you work in the public sector, you have nothing to worry about. Your pension is gold plated. If you work for one of the dwindling number of large companies that offer guaranteed, defined-benefit pension plans, you probably have nothing to worry about either, at least so long as you work there long enough (as in most of your career) to earn a full pension. And so long as your company doesn't end up like Nortel.

Everyone else? To guarantee a $42,000 retirement income stream, indexed to inflation for 25 or so years, you'll need a nest egg of about three quarters of a million dollars.

Very few of us are going to be able to save that much. Not many people are disciplined enough to sock away the maximum RRSP savings, month after month, year after year, decade after decade, in anticipation of a distant and uncertain reward.

So what to do?

The options

BC and Alberta are leading the call for the creation of a new, voluntary contribution national pension plan, what some are calling a supplementary CPP, or SCPP.

Employees, employers and the self-employed would all be able to contribute. The money would be managed at low cost by a professional board similar to the Canada Pension Plan Investment Board and, though the program would be voluntary, you would be automatically signed up.

You could choose to opt out, but the default position would be "in."

This is the reverse of the RRSP system, where you have to make a conscious effort to open an account, find an investment adviser and make regular contributions. Many Canadians never do.

Others are calling for an expansion of CPP payroll deductions and benefits. That's the U.S. approach and — oh, irony — the federal NDP proposal (PDF).

Others are proposing higher limits for both RRSPs and registered pension plans, as in the U.S.. 

Which choice is best? How about all of them.

Giving Canadians the option of contributing some of their savings to a government-sponsored, professionally managed supplemental CPP would not cost the public purse anything.   Neither would increasing RRSP and RPP contribution limits, as in the long run every cent contributed to these tax-sheltered accounts would eventually be withdrawn and taxed. Higher ceilings would let people with upper-middle class incomes tax shelter enough for their retirements-as they can in the U.S. We should also let the self-employed pay into voluntary, group pensions plans. The self-employed can already buy dental insurance, why not pensions?

Raising CPP premiums and benefits is a little trickier, because half of the CPP premium is paid by the employer.

That means that from an employer's perspective it functions as a tax on jobs, effectively raising the cost of hiring, particularly the hiring of entry-level and low-wage workers. It's the kind of disincentive an economy in recession doesn't need.

As such, the NDP plan to double CPP premiums probably goes too far. But a gradual and lesser raising of CPP premiums to the U.S. level over the course of a decade or more could work. The cost to the taxpayers would be, once again, zero.

While we're at it, let's also raise the CPP contribution ceiling, from the average wage to one and a half times the average wage, or around $70,000. That's still well below the Social Security ceiling, and in any case raising the ceiling has no impact on hiring in lower-income jobs.

Taken together the changes would marry the best of the Canadian approach to the best of the American approach. The result? A novel retirement system, better than either of them.