Houston, We Have a Retirement Problem

Last week the Conservative government announced it was open to studying and consulting on potentially allowing voluntary contributions to the CPP.

Seeing how the same government has for years been resisting calls to improve the CPP, its new openness smells pretty fishy. Just months ahead of an election (and in no way related to the polls showing public support for CPP expansion approaching universal levels), the Conservative government has offered a program that uses the well-known CPP name, but that in fact bears no resemblance to the CPP Canadians respect and support (the government’s CPP proposal is voluntary, employee-funded only, and insecure – the real CPP is none of those things).

Their main policy rationale for the dramatic departure is an oft-repeated claim that Canada is not experiencing a broad-based retirement income crisis. Instead, they argue that only a small minority of Canadians will face adversity in retirement, and therefore a broad-based solution is unnecessary.

In future posts, this blog will take up the argument of targeted versus universal solutions in greater detail. But for the moment, it’s useful to probe some of the reasons why advocates of limited, targeted solutions arrive at their assessment of a relatively limited retirement income challenge facing Canadians.

Their argument goes like this. Today’s low- and modest-income earners are well-served by Canada’s existing universal residence-based pension (Old Age Security), and the income-tested benefit targeted at low-earning seniors (the Guaranteed Income Supplement). Combined with the CPP and provincial top-ups, these two programs replace over 100% of pre-retirement income at the low end of the earnings spectrum, meaning that the living standards of today’s low-income earners will in all likelihood rise in retirement.

Very high income-earners face a bigger challenge replacing their substantial incomes in retirement. But pension policy shouldn’t be concerned with helping the well-off stay that way in retirement – they can look after themselves, especially with a panoply of tax-assisted and tax-deferred savings opportunities available to them (including RRSPs and TFSAs).

That leaves middle-income earners. Many of these households are adequately prepared for retirement, so the story goes, but a minority of middle-income individuals are under-saving to the point where they will face some difficulty maintaining their living standards in retirement. But given the limited extent of the problem, options that are narrowly targeted at this group are called for, not universal fixes.

The labour movement disputes the notion of a small, targeted problem. We reflect what workers see and feel: widespread insecurity and mounting retirement challenges that will leave significant portions of future generations of retirees facing significant pressure on living standards.

Why the radically different opinions about the scale of the problem? From our perspective, it boils down to which direction you’re looking in.

In the first view, you’ve got your camera pointed backwards, taking a snapshot of the cohort of baby boomers retiring today. What you see is a cohort that was more likely to have real pension plans, stable and secure employment and rising real incomes, climbing home equity values, and strong investment returns in the 1980s and 1990s. Large numbers of married women increased their labour market participation in the 1970s and 1980s; they gained access to workplace pensions (especially in the public sector), and accumulated larger CPP benefits, driving down Canada’s old-age poverty rate to among the lowest levels in the industrialized world.

To be sure, not everyone who owned a home and spent their peak earnings years during this era is going to be okay in retirement. A significant chunk of middle-income baby-boomers are going to see falling living standards if nothing is done – and most voices on both sides of the debate agree on this point, even if they differ on the size of the group at risk. But many (albeit far from all) in this generation are retiring with pensions, decent retirement incomes, paid-off mortgages, and considerable wealth in the value of their homes.

Now focus the lens in the opposite direction, in order to see the very different future awaiting coming cohorts of retirees. These Canadians are more likely to work in insecure jobs without a pension plan. They’re entering the labour force later in life and purchasing homes later, giving them less time to build up retirement savings; they will also be more likely to carry mortgage debt into retirement, along with the consumer debt accumulated to compensate for sluggish growth in real incomes. They will therefore retire with lower individual and workplace savings, and with a greater reliance on public pensions. As average real wages rise (however slowly), the relative incomes of seniors dependent on inflation-indexed OAS and GIS benefits will fall behind, and the rate of old-age poverty will rise – as it already is rising.

For a shrinking minority that continue to participate in a pension plan, the cost and risk of providing secure, adequate retirement incomes (and one could add post-retirement health benefits) is shifting from employers to workers – in both the private and public sectors. In all likelihood, these future cohorts will live longer in retirement, but will not be able to rely on workplace pensions to provide secure, adequate benefits until they die. If they do have pensions, even low inflation will gradually eat away the value of their pension incomes. They will have to carefully limit spending in retirement, for fear that they will outlive their savings. And the value of their homes will be their last-ditch insurance policy against unexpected illness, long-term care needs, or outliving their savings; but they will be unwilling to voluntarily cash in this insurance policy, if at all, until late in life when all other income is exhausted. (We’ll take up in a subsequent post whether and how this house wealth might be transferred to subsequent generations.)

The point we’re trying to make about past and future-oriented perspectives on the issue is that retirement security takes an entire working lifetime and an effective pension system to achieve, meaning we’ll have to wait decades before today’s changes in pension policy are felt by retired Canadians. In the same vein, the economic lives of today’s retirees are largely the product of yesterday’s pension system and labour market. Many of the factors that shaped the retirement experiences of the baby-boom generation just don’t exist anymore, or are under serious threat. The dramatic rise of precarious employment, the abandonment of many workplace pension plans, and attacks on our public pension system (e.g. OAS and GIS eligibility being delayed to age 67) make the retirement income prospects of current workers much bleaker. Looking at yesterday’s result to deal with a likely problem arising today just won’t work.

And that’s why the CPP debate is so important: it’s one of the few social policy debates today actually focused on the well-being of millennials. Expanding the CPP would provide modest improvements to the benefits of older workers reaching retirement, but it’s really about the retirement security of today’s youth.

photo credit: “No one believes the story exactly, but the room gets quiet because everyone listens.” via photopin (license)


  1. Jo-Ann Hannah says:

    Excellent analysis, absolutely to the point (from a labour perspective). Thank you! Jo-Ann Hannah, Unifor


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