Canada retirement system cracks C.D. Howe Institute report, Digi Mart USA News: Middle- and higher-income earners in Canada are the group most at risk of not having enough money once they retire, according to a report from the C.D. Howe Institute released on Tuesday.
The think tank said those without pension coverage have long been the most exposed to inadequate income replacement.
Authors David Boisclair and Pierre-Carl Michaud examined how well Canada’s pension system has served seniors and where weaknesses are emerging. They said the public system, which includes the Canada Pension Plan (CPP), the Quebec Pension Plan (QPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), is generally meeting its goals of replacing income and keeping seniors out of poverty after they stop working.
However, the authors said several warning signs point to trouble ahead, including the continued decline of workplace pension plans. “Coverage in the private sector has eroded from an already low level, despite high hopes when Canada’s retirement system was established,” they said.
About one in four private-sector workers now has a workplace pension, compared with 35 per cent in 1980. Fewer have a “quality” defined-benefit pension plan, at 40 per cent compared with 90 per cent in 1980.
“This is particularly concerning for above-median earners,” Boisclair and Michaud said, because the more an individual earns, the less public pensions replace.
The authors estimate that income replacement from private pensions has fallen 10 percentage points over the past two decades. The decline is not confined to the private system, they said, since OAS is “steadily losing ground as a source of income replacement,” also down 10 percentage points over the past 20 years.
OAS is indexed to inflation but not to wage growth.
Assuming wage growth runs one per cent higher than inflation, OAS’s ability to replace income would fall by 22 per cent over two decades, the authors said, and the same applies to GIS. “Future retirees who rely heavily on OAS/GIS will therefore see lower replacement rates than today’s retirees,” they said.
“These trends suggest that Canada’s retirement income system risks falling behind.”
The authors offered several ideas to strengthen these sources of income as the share of Canada’s population approaching retirement grows and cost-of-living pressures persist. For private pensions, they said Canada should consider encouraging or mandating a program similar to Quebec’s Voluntary Retirement Savings Plan, which requires employers to offer a basic savings plan with auto-enrolment.
Another option is expanding the CPP/QPP above a certain earnings level.
They also suggested combining OAS and GIS into a “Canadian seniors benefit” aimed at easing poverty, and expanding CPP/QPP with higher employer and employee contributions. Either way, “it is time to revisit Canada’s retirement income system,” they said.
