CPP reform essential in light of sagging savings

The stalled engine of pension reform sputtered back to life late last year with surprising word thatfederal Finance Minister Jim Flaherty and his provincial counterparts areconsidering making changesto the Canada Pension Plan and will bring specific proposals to the table when they meet again this June.

Thanks in part to an about-face by Quebecwhere the new, left-leaning Parti Qubcois government is more open to the ideathe ministers emerged from a meeting in December 2012 with an agreement to work toward a "modest increase" of CPP benefits, to be enacted once the economy improves beyond certain yet to be determined "trigger" points.

"There's no consensus on CPP expansion at this time," Flaherty said at the time. "[But] the ministers did agree that we would task our officials with working on definitions of 'modest increase' and 'economic triggers' that we would then discuss at our next meeting in June."

Making any changes to the national pension plan requires the approval of two-thirds of the provinces representing two-thirds of the population. An earlier reform effort led by Flaherty in 2010 died after failing to win the support of Alberta and Quebec, which was led bya Liberal government at the time.

Not saving enough

CPP's investments are handled on behalf of the government by theCanada Pension Plan Investment Board while Quebec's separate QPP is managed by Caisse de dpt et placement du Qubec. CPP investments have been doing very well, and so far, the government has not had todip into them to pay out pension benefits, but many observers say that won't be enough to meet thefuture demands of Canada's aging population.

Financial analysts and politicians have been warning for some time that we are not saving enough for retirement, as company-led registered pension plans have become scarce and other investment options have either dried up or gone unused.

Only 24 per centof eligible tax filers contributed to an RRSP in 2011, depositing a total of $34.4 billion, less than five per cent of what they were allowed tocontribute, according to Statistics Canada. In 2011, just over six million Canadians belonged to a registered pension plan (RPP).

Household personal savings have been falling from a high of 20.2 per centin the early 1980s to a low of 2.1 per centin 2005, according to Statistics Canada.

Savings have rebounded slightly since then the savings rate was 3.9 per cent in the third quarter of 2012 but are still, on average, "woefully inadequate" to finance a comfortable retirement, according to arecent report from the Bank of Montreal.

"Returns over the next10 years are going to be extremely low becausevolatility in the equity marketsis extremely high," said Leo Kolivakis, a former analyst with the Caisse and thePublic Sector Pension Investment Boardwho now publishes the blogPension Pulse.

"How are people supposed to make and save money in this environment?"

Pooled pension plans haven't taken off

CPP is currently doing very well.Its portfolio has grownrapidly to some $170 billion, yet it makes its payments to retirees on the strength of garden-variety payroll contributions. That is expected to change by 2021, however, when the fund will have to start drawing on its investment income in order to make ends meet.

When Ottawa was blocked on CPP reform, it instead introducedpooled registered pension plans(PRPPs), a compromise aimed at the self-employed and those at smaller workplaces where no RPP is in place.

Like CPP and QPP, the voluntary PRPPs are supported by payroll contributions, though companies themselves are not required to chip in. The contributions are pooled, reducing administrative costs, but payouts are more susceptible to changes in the market and are not indexed for inflation.

Critics, including the Canadian Labour Congress, say PRPPs do little except reward banks and insurance companies with fees.

The Quebec Liberalsmoved quicklyto approve such plans, known there as voluntary retirement savings plans, though the effort was derailed by the change in government. The Parti Qubcois is reportedly planning to revisit the idea, perhaps as early as this spring.

Pooled plans are under consideration by other provinces as well, though Ontario's finance minister,Dwight Duncan, has said he will block PRPPs unless changes are also made to the CPP.

NDP, Labour Congress call for doubling of benefits

But although many politicians and advocacy groups agree changes to the pension system need to be made, there is little agreement on what a reformed CPP should look like.

The New Democrats and the Canadian Labour Congress, for example,have proposed adoubling of the current CPP monthly benefit, phased in over a seven-year period, an increase they say could be covered through relatively modest premium hikesamounting to acontributions increase of 0.43 per centof pensionable earnings per year for workers and employers.

Their plan would see the CPP cover up to 50 per cent of pensionable earnings, from the current 25 per cent.

Critics say boosting contributions would put too much strain on the still-fragile economy, but Kolivakis says "now is the time" to reform the CPP.

"The reality is it will improve productivity of workers, because they know they'll have safe retirements," he said. "And it will mean lower social welfare costs down the road.

"The best thing to do is expand CPP. It's portable, you can take it with you wherever you work and the money is being managed by professionals."