It’s a relatively modest dream.
You work, you put money into a company pension plan, maybe a few bucks into an RRSP too.
And when you retire, you earn enough to live roughly as comfortably as when you were working.
But it’s a dream that’s slipping away from many Canadians. Pension experts estimate that about 30 per cent of the population will be poorer in retirement, sometimes significantly, and the share grows every year.
The labour disputes at Air Canada and Canada Post are powerful reminders of a deepening pension crisis. Both companies are facing an unhappy future unless something is done. They have billions of unfunded pension obligations and an ever-expanding base of retirees.
And Air Canada and Canada Post workers are among a fortunate, but shrinking minority: They have workplace pensions.
Most Canadians don’t. In 2008, only 38 per cent of working Canadians had a workplace pension, down from 46 per cent 1977, according to a 2010 study by the Institute for Research on Public Policy.
“The decline has been continuous and gradual,” according to the report by Bob Baldwin, an adviser to the Ontario Expert Commission on Pensions and a former Canadian Labour Congress official.
The result is an increasingly uncertain future for most Canadians. More than six out of 10 workers rely primarily on the Canada Pension Plan (or the Quebec Pension Plan), other government assistance and whatever savings they have.
Making matters worse, the standard workplace pension – the defined-benefit plan – is in deep trouble. In a defined-benefit program, the employer and the employee pay into a plan that offers a set monthly
payment to retirees (typically, a percentage of pre-retirement income).
A combination of economics and demographics is making defined-benefit plans an endangered species. In the 1970s, if you had a pension at work, chances are it was a plan that offered a guaranteed retirement income. Ninety-five per cent of workers covered by plans had one. The share is now 80 per cent. In the private sector, where most of us work, it’s 60 per cent and falling fast.
Both Air Canada and Canada Post, which have billions worth of unfunded pension liabilities, entered contract talks determined to create two-tier pensions. Existing employees would continue to get a guaranteed income at retirement. But new hires would be put in a defined-contribution plan, in which the employer makes regular payments into employees’ pension funds but offers no commitment to what the payout will be. (Canada Post has since taken this demand off the table, but it’s still insisting that new employees work five years more to qualify for a full pension).
The problem is that the bulk of the working population is aging and starting to retire. That means a growing share of employers will have more retirees drawing on pensions than workers making contributions.
At the same time, the global economy is growing much more slowly than in previous decades. Stock market returns are shrinking and interest rates are at rock-bottom levels, putting tremendous pressure on pensions.
More than 90 per cent of private pension plans in Canada are now in a deficit position, leaving workers at risk if their employer goes bankrupt.
The regulatory environment is also a problem. Tax rules cap surpluses at 10 per cent of a plan’s value, making it hard for companies to build up a large surplus to ride out lean investment years.
The preferred solution in Corporate Canada has been to scrap defined-benefit plans as new employees come on board, offloading the financial risk on younger workers. Unions are typically unwilling, or unable, to fight for the rights of future generations of workers. Air Canada’s ticket agents, for example, caved and will now most likely have a two-tier pension regime, pending arbitration.
Somewhere between the vagaries of defined contribution plans and unsustainable defined pensions there is another way. Too little attention is paid to the range of solutions that blend elements of both, argued Mr. Baldwin, the pension expert. These include increasing CPP benefits (and premiums), encouraging more pooled pension plans, opening large public sector pensions to private sector workers, forcing workers to make workplace pension contributions and tailoring investments in defined contribution plans as workers near retirement. And taking employers right out of the equation would help end the mistrust and conflicts that prevail now.
“There are all kinds of things you can do to dice and slice the financial risks,” Mr. Baldwin said in an interview.
Unfortunately, there’s scant evidence that companies, unions and government policy makers are giving the alternatives much thought as the system lurches on.
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