Pension experts say we're rushing headlong into a big retirement income gap in this country unless we take steps to beef up the so-called three-pillar approach to providing retirement income. Those pillars are:
- Old Age Security and Guaranteed Income Supplement programs.
- Mandatory public pension schemes like CPP and QPP.
- Private savings vehicles like RRSPs and workplace pension plans.
In spite of those three pillars, surveys show that millions of us won't have enough retirement income to comfortably meet our living expenses after we stop working. For many people, at least one of those retirement income pillars is missing or at least wobbling precariously.
The facts are not pretty:
- Only 34 per cent of Canadians are covered by a workplace pension plan.
- About a third of us have no retirement savings at all.
- The maximum CPP retirement benefit for someone who retires at age 65 is $960 a month, but the average CPP pension is actually just $512.
- The median value of an RRSP for workers 55 and older is just $60,000.
- In a typical year, only a quarter of us put anything into our RRSPs, and most of us don't contribute nearly as much as we could.
The federal government's attempt to address that income gap is the driving force behind its Pooled Registered Pension Plan (PRPP) announcement in November.
CPP changes that are coming
By 2013, people who begin taking their CPP retirement pension after age 65 will see their pensions increased by a larger percentage (0.7 per cent per month versus the old rate of 0.5 per cent per month). That results in a 42 per cent increase for people who wait until age 70 to begin collecting.
By 2016, people who begin taking their CPP retirement pension before age 65 will see their pensions reduced by a larger percentage (0.6 per cent per month versus the old rate of 0.5 per cent per month). That results in a 36 per cent reduction for people who start collecting their retirement pension at age 60.
Finance Minister Jim Flaherty has been floating the idea of the PRPP since 2010, when it became clear that there was significant opposition to the idea of gradually boosting CPP payouts and premiums — something supported by seven of the 10 provinces, along with many seniors groups and unions.
But such a CPP boost would have required gradual increases in mandatory premiums paid by both employee and employer, which attracted criticism from Alberta and Quebec and such groups as the Canadian Federation of Independent Business, which called it a "job killer."
Enter the PRPP, a pension scheme aimed at self-employed Canadians and especially at those at smaller workplaces where no company pension plan is in place.
Here are some of the key points:
- PRPPs are voluntary. But employees will automatically be enrolled in any PRPP offered by the employer unless they choose to opt out. Businesses would also not be forced to contribute anything to them.
- Employees could contribute through payroll savings, making it easy to contribute.
- Contributions would be pooled, allowing for lower administrative costs.
- Money would be managed by third parties like financial institutions.
- Pension payouts would depend on market performance of the contribution pool so benefits would not be guaranteed; workers would assume all market risks.
The broad strokes of the PRPP have been known for months, and they've attracted their share of critics. The Canadian Labour Congress, for example, calls the PRPP "a piecemeal approach" that merely rewards banks and insurance companies with fee income instead of offering "real retirement options." Critics note that PRPPs (unlike the CPP) won't require employers to contribute anything, and they won't provide guaranteed or inflation-indexed benefits (like the CPP).
Personal finance columnist Preet Banerjee said PRPPs would be more effective in closing the retirement income gap if they were mandatory.
"The people who are more likely to opt out are the people who are struggling to make ends meet, and they are arguably the people who need something like this the most," he told CBC News.
How other countries are addressing the retirement income gap
|Country||Policy or proposal|
|U.S.||The full retirement age for Social Security has been boosted to 67 for those born after 1960.|
|Britain||Starting in 2012, almost everyone employed in Britain will be enrolled automatically into a pension scheme, but employees will have the right to opt out.|
|France||The normal retirement age was boosted in 2010 from 60 to 62.|
In January 2011, Spain boosted its retirement age from 65 to 67.
|Germany||Germany lifted its retirement age from 65 to 67 in 2007.|
|Australia||Employers are required to contribute 12 per cent of each employee's salary into a superannuation fund.|
He's also less than thrilled about yet another financial term for people to learn.
"We have RRSPs, TFSAs, RESPs, PRPPs — you name it, we've got an acronym," he said. "A lot of people suffer from paralysis with all these choices."
There's also the issue of how many Canadians will be interested in a PRPP. Why will people who don't now contribute to an RRSP want to contribute to a PRPP? Will the PRPP be able to make any real progress in closing the retirement income gap that so many observers have identified?
The federal government has now tabled legislation to implement its part of the PRPP framework. But provinces will need to introduce their own enabling legislation, and the expectation is that most will soon do that.
So far, only Quebec has taken any action. Under Quebec's rules, businesses will be required to offer PRPPs to their workers, but employees will be able to opt out if they don't want to participate. The idea is that such an auto-enrollment arrangement may see more employees staying in the plan by default. But that remains to be seen. It's not clear how many other provinces will require employers to offer PRPPs to their workers.
One thing that does appear clear is that, with the economy still struggling to recover, Ottawa is not currently interested in expanding the existing CPP to improve retirement benefits.
"This would not be the best time to impose an additional burden on business by requiring higher CPP premiums," Flaherty said in early November.
"This is an issue we continue to discuss."