Posted: Tuesday, 13 December 2011

(Published in the Victoria Times Colonist, December 13, 2011)

Canada’s federal and provincial finance ministers, including British Columbia’s Kevin Falcon, will meet in Victoria later this month. They must know that Canada is approaching a retirement income train wreck and that they have to do something about it. Our pension income system is not up to the challenge of an ageing society, or the workplace realities of today’s young workers.

British Columbia’s momentous demographic transition is in full swing and workers are poorly positioned for a retirement that would offer them financial security. The population aged 65 and over will double in the next 25 years, and by that time the ratio of working-age British Columbians to seniors will have fallen from a little less than five-to-one today to just 2.5 to one. Cities such as Abbotsford-Mission, Vancouver and Victoria are ageing noticeably but the greying trend is even more evident in rural areas.

Just how well-prepared is the province economically for this seismic shift? Not so well, as it turns out. Only 28.5% of workers in British Columbia were covered by a workplace pension plan in 2010. Those that do have a pension plan are struggling to hold onto it, as employers do everything they can to jettison risk and eliminate costs by converting defined-benefit plans to defined-contribution plans.

What’s a worker to do, then? Open up an RRSP or a tax-free savings account? Well, no. Most British Columbians simply are not using these private savings vehicles. Only about one in four eligible Canadians have bothered to open a TFSA since they were announced in the 2008 federal budget. And the $4.4 billion that British Columbians contributed to RRSPs in 2010 represented just 5.1% of the total RRSP room available to eligible tax filers.

British Columbia’s residents can be forgiven for steering clear of the retirement savings industry – market meltdowns have decimated portfolios no fewer than five times in the last two decades. Industry management fees and expenses are also a serious turn-off. A Morningstar study published earlier this year gives the Canadian mutual fund industry an F- for having the highest fees among the 22 countries surveyed. With a median total expense ratio of 2.31% for an equity fund, Canadian investors can expect to lose over half of their investment account balance to fees by the time they retire.

Without access to a pension at work, BC employees are left to depend on Old Age Security (OAS), the Guaranteed Income Supplement (GIS), and the Canada Pension Plan. This is a recipe for poverty among retirees in the decades to come.

As for today’s younger workers, they routinely move between a succession of low-paid casual jobs and temporary employment contracts, very few of which feature high-value workplace benefits like pensions. These individuals may change jobs, and even careers, numerous times during their working lives. Having a pension that follows them from job to job, from location to location, from the first day of work until retirement, is vital.

Fortunately, we have a pension plan delivering secure, predictable retirement benefits to Canadians at low-cost. Virtually all employed and self-employed Canadians already contribute to the Canada Pension Plan (CPP). The CPP is fully portable and provides an inflation-indexed lifetime retirement benefit to millions of retirees. The CPP enjoys low costs on account of its large scale, efficient administration, and professional governance, and the Canada Pension Plan Investment Board oversees a diversified and professionally-managed fund on behalf of the plan. And benefits are paid for by contributions and investment income, not tax revenues.

But CPP benefits were intentionally limited from the very beginning to replace just 25% of average pensionable earnings – ironically, in order to leave room for workplace pension plans that employers are now deserting in droves. We could double future CPP benefits for today’s young workers through a modest, phased-in increase in contributions over a period of time. Those pundits who claim this would discourage hiring should remember that the CPP contribution rate rose fully 65% between 1997 and 2003, and during that time the unemployment rate fell from 9.1% to 7.6%.

We should think hard about the unfairness of the tax bill that today’s young workers will face as more and more retirees are forced to draw on taxpayer-funded GIS benefits. Workers and their employers ought to be the ones putting aside money now to ensure a decent income in retirement.

But 85% percent of small businesses currently offer neither a pension nor a retirement savings plan for their workers. Businesses without pension plans have an unfair competitive advantage over those that do. They also know that individual taxpayers will be increasingly on the hook for supplemental programs like the GIS because some companies don't provide pension plans. By definition, this is a subsidy to businesses that fail to provide workplace pension plans.

British Columbia is facing a big pensions challenge. We’ve got to get moving and improve the best features of the system we’ve got – the Canada Pension Plan. That is exactly what the finance ministers should commit to in Victoria.

Ken Georgetti is president of the 3.3 million member Canadian Labour Congress.