Room for Improvement
Boasting a true mix of private and public
provisions, Canada has been justly lauded for having a widely diversified system.
But because of the decline in workplace
pension coverage (especially DB plans)
and indications that today’s workers are
not saving at a rate adequate to provide
retirement income security, concerns are
growing about the retirement income security of future generations of workers.
Three generic systems have been put
forward as possible models for a new
pension paradigm in Canada.
■ ■ Expansion of the Canada/Quebec
Pension Plans—The C/QPP can be expanded by raising the 25 percent benefit
rate, by covering more earnings (through
a rise in the YMPE), or both. Raising the
25 percent benefit level would present
problems because in the wake of 1996
reforms of the C/QPP, any new benefits
must be fully funded. This would create
a large contribution rate for low-income
workers but only marginally larger total benefits because of the impact of the
GIS claw-back. Any additional benefits
also would not be payable in full until
40 years in the future.
Raising the YMPE is more attractive since it doesn’t require additional
contributions until earnings exceed
the YMPE. This idea initially seemed
to have quite a bit of traction. But it
would require approval by two-thirds
of the provinces representing two-thirds of the Canadian population to
amend the C/QPP. This isn’t easy, and
as a result, all 11 Canadian finance ministers announced in December that they
would not be proceeding on an expansion of the C/QPP at that time.
In addition, for most employer-sponsored DB plans, one would expect that
any rise in the YMPE would be mirrored
by a decrease in benefits on the same
earnings from the employer-sponsored
plans, leaving workers no better off at
the end of the day.
■ ■ Supplementary dC Plans—New
plans could be created to supplement C/
QPP benefits. In most of the models under consideration, enrollment would be
automatic but participants could opt out.
To avoid the effect of the GIS claw-back,
some of the models forgo contributions
on earnings up to about $30,000. Administration would be kept at arm’s length
from the government and could be done
by a private-sector administrator. One of
the advantages of the models is that they
could operate at a much lower cost than
an individual savings arrangement. One
model under consideration targeted a 60
percent total replacement ratio. At the December meeting, however, the proposal for
supplementary DC plans received little to
no support from the finance ministers.
■ ■ Target Benefit dB Plans—In these plans,
the first step is choosing a target benefit and
then working backward to determine a de-
fined contribution that would achieve that
benefit if the actuarial assumptions became
reality. The plan looks a lot like a DB plan to
the employee, but is actually a DC plan from
the employer’s perspective.
The next Generation
Canada has a pension system that’s
capable of providing a high level of retirement income security to its citizens.
The system has been applauded around
the world—and rightly so. Canadian retirees today are doing well. Poverty rates
are low, and replacement ratios are high.
There is concern, however, that the
next generation of Canadians isn’t saving at a rate that will provide adequate
retirement income. This concern is what
informs the current debate on pension
reform in Canada.
roBert l. Brown is a retired
professor of actuarial science at the
university of Waterloo.
This article is adapted from a presentation
given at the SOA Living to 100 and Beyond
International Symposium, which was held Jan.
5-7 in Orlando, Fla. ( http://livingto100.soa.org)