Posted: Tuesday, 19 October 2010

The Canadian Labour Congress (CLC) proposes to phase in a doubling of Canada Pension Plan benefits from 25% to 50% of average earnings on a pre-funded basis. Additional contributions from workers and employers would be invested to pay for higher pensions in the future.

A 100% increase in future CPP benefits can be financed by raising CPP premiums by only 60% over seven years. It would take approximately 40 years for the new system to be fully mature, but a higher pension credit would be earned in each year following a decision to expand the CPP. Partial benefits would be earned while the premium increase is being phased-in over seven years.

While the maximum CPP retirement benefit is $934.17 per month, this goes only to those who have consistently earned above the average over their entire working life. The average monthly CPP retirement benefit in 2009 was just $501.97. Our proposal would increase the average benefit each year, and double the average benefit when fully implemented. In fact, future benefits will be higher since they will be boosted by any increase in real wages in the future.

Our retirement income system should give workers an income they can count on through the years they spend after leaving paid work. Most experts believe this means that they should get 60 to 70% of their previous earnings for life, fully indexed to inflation.

Public pensions — the Canada Pension Plan (CPP) and Old Age Security (OAS) — provide secure pensions which are fully indexed to inflation. All citizens (except recent immigrants) get OAS, paid for from taxes, and all workers (including self-employed workers) contribute to the CPP over their working lives. The CPP provides a fully portable, secure, inflation‑indexed, defined benefit pension at very low cost.

But public pensions (CPP plus OAS and the Guaranteed Income Supplement) provide only a bare-bones pension — a maximum of about 40% of previous earnings in theory, and about one-third on average. That means that most workers must rely on the private part of our pension system — employer pension plans and RRSPs — for a big chunk of their retirement income.

Experience has shown that private pensions provide, at best, very uncertain returns. In the recent financial crisis, many RRSPs lost a huge chunk of their value, and some employer pension plans went under leaving large unfunded pension promises.

Only about 3% of income is saved through RRSPs each year, far below what is allowed, and there is now more than $500 billion of unused contribution room. Less than one in three workers pay into an RRSP each year, and, as shown in Table 1, the majority of contributions were made by those who earn more than $80,000 per year. Average RRSP savings of an older worker nearing retirement are only about $60,000 — enough to pay for an annuity of less than $300 per month.

Table 1 - RRSP Contributors and Contributions in 2008

RRSPs are much more costly than big pension plans. Most mutual funds have management expense ratios of between 2% and 3%, much higher than the CPP management cost of less than one-half of one per cent.

There has been a marked drop in private pension plan coverage with employer plans now covering only 38% of the workforce, down from 46% in 1977.

Recent studies have shown that the proportion of middle income earners who get less than 60% of their previous earnings in retirement is about 20 to 30%, and is set to rise significantly as pension coverage falls. This is a hugely important issue in the context of a rapidly ageing society. Over the next twenty-five years, the number of Canadians aged 65 and over will more than double (up 115%), and the number of seniors for every 100 persons in the workforce will also double, from 20 to 40.

Seniors with very low incomes qualify for a public pension top-up through the Guaranteed Income Supplement. But the total amount falls short of raising them to a decent standard of living. The maximum amount of OAS plus GIS is only $1,169 for a single person, or $14,034 per year. That is why the CLC has called for a 15% increase in the GIS to lift all seniors out of low income.

Provincial governments are responsible for providing a very wide range of services to seniors, including health care provided by physicians and hospitals, and long-term and home care. Most provinces provide drugs to seniors at low cost, and most provide income assistance to lower income seniors to supplement CPP and OAS/GIS.
The pressures on provincial budgets arising from population ageing would be significantly reduced if future seniors had better pensions than they will receive under current arrangements.

Table 2 Population Projections

An Ageing Population

Between 2010 and 2036, the number of persons aged 65 and over in Newfoundland and Labrador will double to 156,000, and the number of seniors for every 100 persons of working age (ages 15 to 65) will rise from 21.9 to 58.1. (See Table 2 on Population Projections.)

Employer Pension Coverage

In 2005, 51% of workers in Newfoundland and Labrador were covered by an employer pension plan, well above the national average of 38%. However, coverage has fallen from 54% in 1997.  The median income of senior families from private pensions, investments, and work was just $10,400, and much less for singles.

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