But ‘pooled’ pension plans win out at ministers’ meeting
Raising the Canada Pension Plan eligibility age from 65 to 67 will save $20 billion over the next four decades and should be part of any government pension reform plan, according to a report from the School of Public Policy and Governance at the University of Toronto.
The CPP is currently sustainable but there has been a rapid growth in life expectancy, said Martin Hering, assistant professor in the department of political science at McMaster University and co-author of Raising the Eligibility Age in the Canada Pension Plan.
Life expectancy increased by about 30 years in the 20th century. From 1966, when the CPP was first introduced, to 2010, life expectancy increased by about 10 years for men and eight years for women. For those born in the 21st century, life expectancy is estimated to be between 90 and 100.
The longer people live, the more years they receive their pension and that puts more of a strain on the system, said Hering.
“The CPP is sustainable at the moment,” he said. “But life expectancy has put quite a bit of pressure on it.”
Every time there has been a new actuarial report, life expectancy is always higher than predicted and by 2050, life expectancy will probably be at least three years higher than it is today, he said.
“We are consistently underestimating life expectancy gains,” said Hering.
The government should raise the eligibility age for the CPP (and Quebec Pension Plan) from 65 to 67 and raise the earliest age for collecting reduced benefits from 60 to 62, stated the report. This change should take place over 12 years and begin in 2012.
A gradual increase in retirement ages would save the plan $14.7 billion in expenditures and result in $4.8 billion more in contributions by 2050, for a total savings of nearly $20 billion, stated the report. Based on the CPP’s chief actuary’s best estimate of wage growth and investment return, the plan would see an additional $982 billion in assets by 2050.
This would provide governments with the flexibility to raise pension benefit levels, with a small increase in premiums, or maintain benefits, with no increase in premiums, said Hering.
But the government has to act soon because the implementation has to be gradual so employees and employers can get used to the idea and it will take decades for the change to pay off, he said.
“If you want to change retirement ages, you need to do it well in advance. We can’t wait until we have a problem of sustainability, we have to do that proactively,” said Hering.
The United States, Germany and Australia have already passed legislation to raise the retirement age from 65 to 67 and the United Kingdom is raising the age from 65 to 68. France and Spain have proposed similar legislation. However, Canadian governments have been silent on the issue, said Hering.
“I’ve always been puzzled by that,” he said.
Much of the talk around pension reform has focused on raising the CPP benefit rate but this has caused divides between labour and employer groups.
“A replacement rate increase in the CPP is a great idea. It is really something that we should be doing. We should have done it a long time ago,” said Hering.
“Some contribution rate increase is also acceptable to achieve that but in order to make it more acceptable to the provinces, to business groups and perhaps also some political parties, a retirement age increase would also need to be added to the mix.”
But not everyone agrees the CPP is at risk. Unlike the countries that are raising retirement ages now, Canada raised CPP contribution rates in the 1990s to maintain the current level of benefits, said Scott Claussen, a partner at consulting firm Mercer in Toronto.
“If you look at current studies of the Canada Pension Plan, they’re forecasting that even with the baby boomer population, even with improvements to mortality, the plan is on sound financial footing for at least another 75 years,” he said. “Perhaps with longevity continuing to improve, something will have to happen at some point in time but at this point it’s not needed in Canada.”
Also, the debate of whether or not the retirement age should be 65 or 67 is moot when most people with employer pension plans retire before 65, said Claussen. This is especially true among public sector employees with pension plans that pay out a full pension at age 60 or younger.
More definitely needs to be done to discourage early retirement and encourage people to work longer, agreed Hering.
There has been some movement on this front with the elimination of mandatory retirement and the introduction of phased retirement provisions that allow workers to collect partial pension benefits while accruing future benefits.
Also, the CPP benefit reduction for early retirement at age 60 has been increased from six per cent to 7.2 per cent per year, while the benefit increase for late retirement (after age 65) has increased from six per cent to 8.4 per cent per year.
But governments should focus on the fact only 25 per cent of employees are covered by a pension plan, said Claussen.
“The real change that’s needed is to find a way to increase the level of coverage among all Canadians,” he said.
One way to do that is to increase CPP benefits. Labour groups, including the Canadian Labour Congress, would like to see CPP benefits double (with a 0.43-per-cent increase in contributions over seven years).
A more realistic option is to increase the amount of annual earnings that are covered from the current maximum of $47,200, said Claussen.
Low-income Canadians fare pretty well in retirement with CPP, Old Age Security and the Guaranteed Income supplement, he said.
“The individuals that seem to have the greatest potential for shortfalls are more the mid-income levels, the $40,000 to $100,000 ranges. That’s partly because that’s where employer pension plans have disappeared from,” he said.
The second option is to find a way for more employers to offer pension plans, either through multi-employer plans or another mechanism that would reduce administrative costs, said Claussen.
After a meeting of provincial finance ministers on pension reform in late December, federal Finance Minister Jim Flaherty announced a “pooled” registered pension plan or PRPP would be introduced.
The defined contribution plans would be administered by a third party and allow small businesses that otherwise could not afford their own plans to offer a retirement savings plan to employees.
“PRPPs will be a major breakthrough for the Canadian pension market. They will make well-regulated, low-cost, private-sector pension plans accessible to millions of Canadians who have, up to now, not had access to such plans,” said Flaherty. “In fact, many employees of small and medium-sized businesses and self-employed workers will now have access to a private pension plan for the very first time.”
Alberta’s Minister of Finance and Enterprise Ted Morton expressed his support for PRPPs.
“Alberta has been promoting and working on this type of private sector pension innovation with B.C. for the past three years. The one stumbling block for broader implementation had been a lack of interest in Ottawa,” said Morton. “Ottawa’s previous proposed solution — expanding the Canada Pension Plan — was a shotgun approach that would have been ineffective and economically damaging.”
The plans provide a simple, low-cost, effective way of improving coverage for employees of small and medium business and the self-employed, he said.
The proposed PRPP would also have an auto-enrolment feature that promotes higher employee participation and an auto-escalation feature that will result in higher average retirement savings for plan members.