Canada’s pension system is simply not doing the job, authors say

Political issues deemed too important or sensitive to be tampered with are often referred to as the ‘third rail’ after the electrically-charged third rail in subway systems … like Canada’s pension system, for instance.

“Many Canadians will be surprised by how much they will need to save to fund their desired income in retirement and that their income is going to plummet,” says Jim Leech, co-author of The Third Rail: Confronting our Pension Failures.

“It’s clear that existing pension structures are not allowing people to reach their saving goals. Political leadership is urgently required to bring a more flexible approach to retirement planning, one that can withstand the pressures of more retirees and longer life expectancy.”

The easiest and most efficient way to close this shortfall is to enhance the Canada Pension Plan, he maintains. But that’s not likely to happen anytime soon since most workers and their employers are simply too short sighted.

As employers and employees each contribute roughly 5% of their pay straight into the CPP, an increase in the rate would mean that employees would have to get a raise larger than the CPP hike to ensure their take-home doesn’t drop. They would, however, see an offset with a larger CPP pension down the road.

Many critics have voiced strong opposition to any boost in CPP contributions, however, labelling it another job-killing payroll tax on businesses. Nonetheless, Ontario is considering launching its own pension plan if it cannot obtain reforms to CPP.

Leech and co-author Jacquie McNish would also like to see some action taken to stem the decline of defined benefit plans — the least expensive way to provide a pension to workers, they argue.

The authors cite Rhode Island and New Brunswick as examples of jurisdictions that have taken drastic measures to address pension shortfalls, including major cuts to municipal jobs and services. But both are cautionary tales.

And they will remain so as long as a government continues to ignore the root cause of the retirement meltdown, they maintain.

Record numbers of workers are retiring and living longer than anyone expected; pension funds have not built in sufficient surpluses to cope with market and demographic stresses, and employers are unwilling to shoulder these steadily increasing costs.

Failure to address these issues immediately will soon lead to disaster, the authors predict.

Would you like to set more money aside using the CPP? If you’re lucky enough to have one, are you concerned about the stability of the plan you’re involved with?