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Policy options for the pension crisis
By Neville Nankivell, Financial Post
May 27, 2003
Canada - As recent articles in
this newspaper have detailed, the crisis in pensions isn't just on the
horizon of an ageing world anymore. It has arrived and its scope is
global. Both state run and private retirement plans are increasingly at
risk. Some governments have started to tackle the issue seriously. Our
government must make this a more urgent priority.
Prime Minister Jean Chrétien
claims changes made a few years ago to the Canada Pension Plan will leave
it financially sound for the rest of this century. But the Liberals have
only been tinkering with pension system reforms. More radical changes are
needed to restore sinking public confidence in the future of retirement
plans. This includes rethinking retirement age norms themselves.
Meanwhile, weak stock market
returns have left the pension plans of more and more companies around the
world financially challenged. This will dint corporate earnings because of
legal requirements to contribute to plans that are excessively underfunded.
At the same time, governments are raising the premiums they impose on
employers and employees to finance pay-as-you-go state-run pension
schemes. This includes the CPP. Some are also cutting back benefits. In
France, more than one million workers went on strike recently to protest
proposals to trim generous pension payouts and raise the eligible age for
The latest Canadian shiver is a
warning by Nick Le Pan, federal superintendent of financial institutions,
that 75 Canadian corporate pension plans are now on his agency's watch
list. This is up from 50 six months ago and includes some of Canada's
largest companies. Many more plans are likely in trouble because this list
covers only federally regulated companies. Most plans are provincially
regulated. A study done for the Association of Pension Management
estimates underfunding of Canadian corporate pension now totals
$225-billion, or 20% of GDP.
Federal and provincial
supervisors will have to keep very close scrutiny on plans that are in
deficit and those taking so-called "holidays" from making
employer contributions. More frequent reviews may be necessary to ensure
proper compliance with funding regulations.
The Ontario government has just
followed some other provinces in proposing to end the practice of a
mandatory retirement age. Other Canadian jurisdictions should also
eliminate this form of "institutionalized ageism." This is
mostly the case now in the United States.
People should be allowed to work
longer if they are capable. Public policy shouldn't encourage early
retirement. This puts stress on pension systems by raising dependency
ratios -- the number of retirees receiving benefits in relation to active
workers paying into plans.
In the last federal budget,
there were improvements in tax incentives to encourage retirement savings.
But these fell disappointingly short of what many groups had proposed,
including parliamentary committees. Canada will still lag behind many
other major economies in terms of the percentage of final employment
income replaced by the present combination of public and private pensions.
Finance Minster John Manley
increased the annual maximum contribution to a registered retirement
savings plan and money-purchase pension plan to $18,000 from $13,500 by
2006. The annual limit for a defined-benefit registered pension plan will
go to $2,000 from $1,722 by 2005. After that, indexing for average wage
increases will go into effect. Nonetheless, it's disgraceful that planned
increases in the limits, first proposed in the 1980s, were delayed for so
long. Adjusted for inflation, last year's RRSP and RPP contribution limits
were actually below their equivalent levels of two decades ago.
When he was finance minister,
Paul Martin chopped back retirement and pension plan contribution limits
as part of his deficit reduction program. He also reduced to 69 from 71
the age limit at which individuals must stop contributing to these plans.
It would have been better to come down harder on the colossal waste that
is still so prevalent in government spending rather than make saving for
retirement more difficult.
What should be considered is the
option of giving individuals the alternative of staying in the CPP or
redirecting their mandatory payroll-tax deductions to individual
retirement accounts. This would give them more personal responsibility
over their retirement funds. It's the direction some countries are going
in. The government should also move quickly on its promise to study the
concept of tax pre-paid savings plans, an approach now being used in the
United States and Britain.
It's also time to completely
eliminate restrictions on the foreign security component of RRSPs and
pension plan investments. This would allow them to diversify portfolios
more widely and generate better returns. Investment decisions for private
and public pension plans should be made solely in the long-term interests
of their members, not for any other reason. Private pension plan members
should also be told a lot more about how their funds are being managed and
how they're performing.
Most importantly, our federal
and provincial governments must keep reducing Canadian personal income tax
rates. They are still too steep compared with many other major economies.
Getting tax rates down must be a higher policy priority than it was in
most budgets this year.
Leaving Canadians with more of
the money they earn would greatly boost their prospects of building
adequate assets for secure retirement.