Public pensions in OK shape

Canada’s plans compare favourably to other nations, but OECD report warns of reduced pension promises
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 08/30/2007

An extensive study of government-mandated pension and retirement pensions around the world shows major reforms will mean a reduced pension promise for workers. And while this has been necessary to ensure the financial sustainability of pension systems, there is still work to be done.

So says the Organisation for Economic Co-operation and Development (OECD) in Paris, which looked at 30 industrialized countries in its report

Pensions at a Glance 2007

. The 108-page document shows how people in these countries will have to save more for retirement, as the average pension promise in 16 countries has been cut by 22 per cent. (Only in Hungary and the United Kingdom did pension promises increase, on average.)

“Reforming pensions is undoubtedly both a challenging and controversial issue because it involves long-term planning by governments faced with numerous short-term pressures,” says the report. “Pension reform is not, however, politically impossible. Countries that have yet to embark on necessary changes to retirement-income provision can learn valuable lessons from those that have already made the journey.”

The impact on workers varies, as several countries have moved towards greater targeting of benefits on poorer pensioners while others have tightened the link between pension entitlements and earnings when working, without putting in place any new social safety nets for low earners.

Edward Whitehouse, senior economist at the OECD and co-author of the report, says Canada spends a relatively small portion of national income on public pensions, at 4.4 per cent of gross domestic product, compared with 7.7 per cent for the 30 OECD countries on average. On the high end, France and Germany spend about 12 per cent and Italy spends 14 per cent.

“The financial and fiscal pressures of demographic aging should not, therefore, be difficult to accommodate (in Canada),” says Whitehouse.

While there have been reforms such as increases in pension age, changes in the way benefits are calculated and smaller real pension increases, the OECD says some countries, such as Italy, Mexico and Turkey, are phasing in pension reforms too slowly.

“The slow pace of change will result in many decades more of relatively high expenditures. These financial pressures might require ad-hoc, short-term adjustments that may perversely cause more hardship than faster reforms would have done,” says John Martin, director of employment, labour and social affairs at the OECD, in the report.

Early retirement is also a problem, adding extra pressure to public finances. Between 1999 and 2004, the average retirement age for men was below 60 in eight OECD countries, including France, Hungary and Italy.

“There is a small incentive (in Canada) to retire early but this is much less of a problem than in other OECD countries,” he says. “The guaranteed-income supplement and the basic pension mean that public spending on pensions is targeted on people with low incomes.”

When it comes to low earners in Canada (defined as those earning half of the average wage) the pension rate (percentage of individual gross earnings) is 75 per cent, a number higher than the OECD average of 59 per cent.

To deal with the reduced pension promise, workers are being told to save more for retirement but the OECD says voluntary plans might not be enough. This has long been an issue in countries such as the U.K., United States and Canada where public pensions are relatively small, especially for middle and high earners.

One way to combat this is automatic enrolment in voluntary private pension plans, under which workers are covered unless they opt out, a scheme recently introduced in New Zealand.

For workers at average earnings in OECD countries,

Pensions at a Glance

says the average gross replacement rate (meaning the ratio between pension benefit and pre-retirement earnings) from mandatory pensions is 59 per cent. However the net replacement rate is 70 per cent.

For Canada, the average male earner has a net pension replacement rate of 63 per cent, compared to the OECD average of 72 per cent.

But it’s the value of the overall pension promise, which takes life expectancy and the indexation of pensions in payment into account, that should matter to governments, says the OECD.

Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit www.hrreporter.com/ccbr.

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