Big pension problems get tiny response

A generation ago, most people could count on buying a home for the equivalent of about three year’s salary. That dream is gone.

Canadians have lost a lot over the years.

A generation ago, most people could count on buying a home for the equivalent of about three year’s salary. That dream is gone.

And a generation ago, most people could count on retiring with a guaranteed pension from their company. They knew how much they would get, and with Canada Pension Plan and old age security, they could count on a comfortable retirement.

It’s extraordinary how that has been taken away, with no real debate.

Companies decided defined benefit plans — ones that paid a guaranteed retirement income — were too costly.

Employee and company paid into defined benefit plans. If the reserves looked they might not provide the promised benefits in future, they had to be topped up.

So companies pushed to eliminate the plans, or change them to defined contribution plans. Employees and company would contribute and the funds invested. The pension would be based on however much money was in the fund on retirement. There was no obligation to provide an income. (Government workers, including MPs and MLAs, still have defined benefit plans. MLAs and MPs believe you should pay for guaranteed pensions for them, but not that you should have one.)

And work changed, from long-term employment with big companies to much less certain work, often part-time or on contract, and without any pension.

In fact, only one in four British Columbians have workplace pensions today.

This huge change in the social contract hasn’t been discussed. And while workplace pensions have been slashed, there has been no corresponding increase in public retirement benefits. Those benefits are low compared to other OECD countries, in large part because Canadians could once count on workplace pension plans.

The Harper government has offered a token response to the pension problems with legislation allowing new pooled pension plans.

It’s a lame response to a real problem. The new plans would give small business the opportunity to provide a pension plan by signing a deal with a bank or investment company. The employees would have the voluntary chance to contribute, and the employer could also contribute if he chose (not that likely, I’d say). The investment firm would take its cut for managing the money and the savings would be available at retirement.

Some employers will offer the plan. Some people will sign on.

But not many. And there is no real benefit over RRSPs; people who have not contributed to their own retirement fund, for whatever reason, are unlikely to opt into voluntary pooled plan.

The government could have easily made the plan at least slightly better. It could have allowed the pooled plans, and  had the funds managed by the Canadian Pension Plan investment experts.

That’s similar to the approach taken in Saskatchewan, where such a plan already exists. That’s also the model promised by the B.C. government in 2008, and never delivered.

That would have provided excellent money management at the lowest cost. Instead, the Harper government offered the banks and the investment houses the chance to manage the money and collect the fees.

That’s strange, because earlier this year Finance Minister Jim Flaherty called for an investigation into the high fees charged by providers of Canadian mutual funds and other investments. A study found Canadians pay more than twice as much in management fees as Americans. Those costs significantly reduce the money being available for retirement. Now Flaherty is opening a new market for them.

This isn’t just an issue for those nearing retirement age.

The giant baby boom bulge is now nearing 65. In 1971, there were 6.2 British Columbians of working age for every person over 65. By 2034, there will be just 2.4 working-age people for each person over 65. If boomers push for better pensions, the cost will fall heavily on those still working.

Footnote: The best option would be a planned increase in CPP benefits, now capped at about $935 a month. That would require increased contributions by employees and employers. The minimum retirees can expect in Canada is about $1,170 per month — that’s basic old-age security plus a guaranteed income supplement for the poorest seniors.