Changes to indexation best solution
Many of today’s middle-income earners will experience a substantial decline in their standard of living once they retire, according to a new study by the Institute for Research on Public Policy (IRPP).
About one-half of Canadians born between 1945 and 1970 and have career-average earnings of between $35,000 and $80,000 are likely to experience a drop in income of at least 25 per cent once they reach retirement, found Projecting the Adequacy of Canadians’ Retirement Incomes: Current Prospects and Possible Reform Options.
Author Michael Wolfson used a micro-simulation model developed by Statistics Canada to examine several pension reform scenarios proposed by provincial governments and interest groups and estimate their effect on future retirement incomes.
He found a gradual doubling of Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) benefits would do very little to improve the retirement income of current middle-income earners. One of the reasons for this is the full pre-funding condition found in all reform proposals which means new pension benefits would only come to fruition several decades from now — too late for those born before 1970.
Simply changing the indexation of the old age security and guaranteed income supplement benefits would yield better results, said Wolfson.
Wolfson also questioned the widespread assumption that pre-funding new pension benefits is necessary to ensure equity between generations.
“What may in fact be most useful in the current pension debate might be to consider not only the size and shape of any extension of the retirement income system, but also the pace of the phasing in of benefits,” he said.