Money. We love it. We hate it. We need it. Planning on growing old? You’re definitely going to need it. How much? Some say about $2 million.
No matter what your take on the issue, our governments are trying to encourage us to save on our own for retirement rather than expecting our employer, or future governments to pick up the tab. The federal government has been floating the idea of Pooled Registered Pension Plans (PRPPs).
At WSIC’s November 19th meeting at the Duke of York, pension lawyer James Pierlot and Ontario NDP MPP Michael Prue lead a discussion of some 40 to 50 people on some of the issues surrounding pensions, proposed changes, conceptions, and misconceptions. Pierlot made recent waves when he co-authored a paper published by the C.D. Howe Institute claiming that PRPPs should be avoided by many low- to middle-income Canadians, and Prue is a member of Ontario’s Standing Committee on Finance and Economic Affairs.
Pierlot started the evening off defining pensions as a guaranteed income stream in perpetuity, rather than a pool of money from which one draws until it runs dry. This led to the crux of his issues with PRPPs; they are not real pensions. Rather, they are a tax-incentivized form of savings account, with potentially negative tax consequences for lower income workers. This means they will not equalize post-career financial security between the 25 per cent of us who have defined benefit (DB) plans, and the 75 per cent who do not.
Pierlot pointed out that, because the total in the PRPP account at retirement depends on the investment performance during the lifetime of the account, the future pensioner does not gain the security of knowledge it comes from DB plans, in which payments are (close to) guaranteed. Worse, a consequence of individuals managing their own accounts is to effectively turn everyone into an investment professional rather than have them focus on what they do best: their current job.
Further, Pierlot’s paper shows that the tax implications of the PRPPs upon withdrawal are such that these rates are “significantly higher than the refundable rates that apply to contributions.” Because of the complexity and newness of these financial instruments, potential members may not be aware of, or understand, the implications of what they are signing up for. This may be part of the reason why current federal rules prohibit any plan from calling itself a pension plan unless it is a DB plan (PRPPs not withstanding).
Pierlot’s solution? A blanket vehicle for everyone, with a $2-million lifetime cap. Anything beyond that cap will not be tax sheltered. This figure was chosen because it is just slightly higher than the pension benefit the average teacher accrues over a career.
Prue agreed with Pierlot that the pension system was in trouble, but focused more on the social implications of policy decisions that will need to be made. He spoke about the idea of raising the retirement age to 67, as Prime Minister Stephen Harper has proposed. He pointed out that when the pension age was set at 65 (by Otto Von Bismark in the 1880s), the average expected lifetime was only about 65.
Simply raising the retirement age did not seem like a good solution to Prue, because it ignores the purpose of having a pension. In old age, we should have the security of having our basic needs met. Both Prue and Pierlot suggested that retirement age could perhaps be career dependent, as those involved in physical labour will not be able to work as long as those with office jobs.
Prue also described Tim Hudak’s recent proposal to disallow new hires in Ontario from DB plans as problematic, since the current DB plans depend on contributions from younger members to remain funded. He asked how the current young DB plan members were going to get paid if there are no incoming members—as there would be no incoming money once they reached retirement.
Pierlot brought up New Brunswick’s new shared-risk retirement savings plan, which he favours. Under this plan, risk is shared among stakeholders—unlike DB or DC plans, which puts all the risk on either the employer or employee respectively. Prue believes we must favour immigration by those who will bolster the economy. By letting in more young, educated immigrants, we bolster our workforce, since they will contribute income over their lifetimes. If we let in more seniors, they will be a net drain, as they will necessarily require greater support from the healthcare system, plus old age security, and will therefore place a larger financial burden on the younger generation.
Both speakers agreed that pooling funds and having them managed as one large unit decreases costs for individuals and therefore brings financial benefits to plan members. As examples they listed large public pensions, such as teachers and nurses pension plans, and the CPP/QPP.
As debate topics go, pension rules and their tax implications can seems a little dry. But they’re an important part of our modern social fabric. We would also like to welcome different points of view on this important topic. Will Canadians carry out the social contract so boldly set out by previous generations? Why Should I Care is doing its part to ensure they do. So can you.
We look forward to seeing and hearing from you at the next event in January. Until then, Happy Holidays!