Re-Engineering the three pillars of Canadian retirement income system

The following is from Workplace Wire and written by the  Heenan Blaikie's Labour, Employment and Pension Practice Group published March 30, 2012 and it makes for interesting reading for those interested in pension issues

 You can read the entire post here: Re-Engineering the Three Pillars

The government has subtly re-engineered the Canadian retirement income system. For the past 45 years, the Canadian system has been described as having three pillars:

(i) Government-sponsored plans. The first pillar has been comprised of the broad-based government run, supposedly universal pension schemes, including Old Age Security, the Guaranteed Income Supplement (“GIS”) and other provincial supplements, and the Canada/Quebec Pension Plans (“Q/CPP”).

(ii) Employer-sponsored plans. The second pillar has been comprised of the employer-provided pension plans, whether defined benefit or defined contribution.

(iii) Individual savings. The third pillar has been comprised of individual tax-assisted retirement savings, primarily through registered retirement savings plans.

More recently, including in its budget papers yesterday, the federal government has conveniently shifted the pillars, because of a glaring weakness in the second pillar. I pointed this out in our March 25, 2010, edition of the Pension Pulse (“Three Pillars: Ten Questions”)

This is not insignificant and should not go unnoticed. Just like the Olympic stadium in Montreal, cracks have begun to appear in our retirement income system and pieces are crashing down. By changing the pillars, somehow our system is made to look stronger and more sustainable.

The three pillars, as described by our federal government, now are:

(i) the OAS, GIS and other provincial supplements;

(i) the Q/CPP; and

(i) all other forms of accumulating retirement savings, including employer pension plans, savings plans, RRSPs and tax-free savings accounts.

I believe part of the reason for the re-jigging is because the old pillar number two, traditionally employer sponsored defined benefit pension plans, are largely defunct, at least in the private sector. By lumping all employer-sponsored plans and private savings into the third pillar, this pillar does not look as weak, relative to the other two. Plus, the new first pillar, being comprised only of the OAS and other non-contributory programs funded exclusively from government revenues, can be treated separately

The spin on pensions continues

The Globe and Mail, believes that "it’s not a given the Conservatives will lose on this issue as the debate matures." The editorial goes on to state, "they are at least now sticking to their main point: Unchanged, the current system will eventually eat up an unprecedented amount of tax money." and that the OAS policy announced this week might be the single best thing the Harper government will ever do for younger Canadians.

The readers comment about this article have some interesting ideas, I found very few of them support this legislation. So no matter how the mains stream media tries to to spin the changing of the OAS rules, most Canadains are not buying the line and the spin is not working . Here are a few of the readers comments from the Globe story:

These statements are false according to many trustworthy sources
Spin, Spin, Spin ....... Harper has the best spinmeisters in the world. Tell a lie often enough and people believe it to be the truth

People in their 40s and younger are double-hosed by this policy. First, their tax dollars pay for two years of benefits for people over 55 that they won't receive. Second, as the younger ones get towards the end of their careers, they won't be able to move into the highest echelons because of the large numbers of boomers staying in those high end jobs longer

Raising the OAS eligibility age will hurt the most vulnerable--low-income seniors and low-income workers who are not able to save during their work lives. Denying them a pension for an extra two years will force many to choose between necessary medications, food, and keeping a roof over their heads.

As to actuarial "necessity", we are only talking about a temporary bump in increased demand on tax revenue to pay for OAS. According to government figures, the OAS as a percentage of GDP for 2011 was 2.4%. That figure is projected to jump to 3.2% in 2030 before dipping below 3% in subsequent decades—2.9% in 2040, 2.6% in 2050, and 2.4% in 2060.

Using a temporary situation as an excuse to permanently cut government support for citizens may be acceptable to conservative ideologues--even if it does inflict severe hardship on the most vulnerable seniors--but it is not good government.

We had a friends and family party last evening with this as a big topic. All 163 of us, who voted PC last May said we will never trust them again. We will all be voting the NDP come next election.

The CON paid trolls try to make anyone who disagrees with the Harpercrite Regime as leftards and libtards etc.. Many of us are Progressive Conservatives who have no Party or are just Canadians who don't believe that a Party in CONTEMPT of Parliament has a right to govern... Democracy is being threatened by election fraud and voter suppresion by the Reformers. Harper certainly isn't a PC. Fascism best describes him and his CULT.

Let's get this clear. This has nothing to do with sustainability. An approach for sustainability would have hit the boomers. That's the biggest burden on OAS. They could have solved this problem by immediately decreasing the income above which OAS is clawed back. Instead, they went with vote buying by leaving out the boomers and punishing the poorest seniors. There was little impact on sustainability when we still have to carry all of the boomers. Standard operating procedure for this government.

So who wants my vote. Whatever party promises to reinstate retirement at 65 I will vote for you.

Pension reform tales from the front.

The following letters were published in the Star.com on March 31, 2012, they speak for themselves Seniors are not happy nor are we Boomers.

Re: Tories add years to working lives, March 30
I “planned” for my retirement. I have been working since I was 17. That was until I became permanently disabled and unable to work five years ago. I receive a Canada Pension Plan Disability pension, which makes up 1/3 of my income, and long-term disability, which makes up 2/3 of my income. As a result of my disability, my income and benefits decreased to about 40 per cent of my pre-disability income.

I now spend thousands of dollars a year on medication and health-care providers delisted by the provincial Liberal government. I can no longer afford to live independently; I had to move in with my parents.

Tell me Mr. Harper, since my long-term disability benefits cease in 13 years at age 65 and my CPP-D decreases, how will I financially survive until the age of 67 when you are taking away OAS and GIS benefits for those two years?
Dawn Wylie, Mississauga

Increasing the eligibility for old age benefits from 65 to 67 is cruel at best. Most Canadians are living on low-wage jobs with no pension plans and struggle to pay the bills, let alone being able to contribute to RRSPs. Making Canadians work longer when some may be in dangerous jobs or have health issues is unfair.

As NDP Leader Thomas Mulcair said, Stephen Harper informed Canadians last June that the Conservatives would not touch the pensions of Canadians and they misled us all. Although CPP was not touched, most Canadians rely on the OAS to top up the measly $12,000 a year the CPP pays out.

Jim Flaherty should have tackled the MPPs’ platinum-plated pension plan first and then looked at the OAS. Better yet, MPPs should live on the equivalent of CPP for a month to better understand the struggles of average Canadians.
Avery Thurman, Oshawa
Many Canadians do not understand what the change to the OAS means. It does not affect me now as I am too old but I understand what it means to people on a low income. Many single women and other Canadians who have no company pension to supplement the old age pension depend on the OAS. To take money away from this group of seniors is like taking from the poor. Stephen Harper and Jim Flaherty should be ashamed. This change is despicable and an eye-opener. It shows me finally what Harper stands for and who he really is.
Elizabeth Richardson, Toronto

How Much Will YOU Lose from OAS Deferral?

The following is from the Progessive Economics Forum website and it was posted by Jim Stanford on March 30th, 2012. I have included it here because I was talking to my brother who is not quite 54 and he was not sure how much he would lose in OAS payment when he turned 67.

Announcing a bad policy 10 years in advance doesn’t make it a good policy.

So the fact that the Harper government is giving people at least 10 years to prepare for 2 years of life without an important source of income, hardly makes it OK — as so many media commentators have tritely implied. In fact, in this case it makes the policy even more unfair.

Likewise, the fact that many young Canadians seem to have (wrongly) resigned themselves to the fact that public pensions won’t be there for them when they retire, hardly eases the pain of this unnecessary, destructive measure. Consider this quote from a Gen X-er (a self-employed marketer … sigh) in today’s Hamilton Spectator: ““I was pretty sure any government-funded retirement will not exist for my generation.” That’s a tragic sentiment, both because of its defeatism, and its misplaced lack of confidence in public pensions. Because the clear reality is that it’s private individual retirement plans that will not be there for him. Compared to those Ponzi schemes, public pensions are like the Rock of Gibraltor — especially for precarious workers like our self-employed marketer. If the Conservatives are counting on fatalistic attitudes like that one to allow this policy to sneak through, I hope they’re proven wrong, for two reasons: I want the policy to be defeated, but I want young people today to have more faith and hope in the solidarity and cohesiveness of future society.
Initially, when the OAS/GIS trial balloon was floated by Mr. Harper in Davos, many seemed to think this policy would somehow betray their core constituency among older voters. In reality, of course, the reverse is true. It is precisely the older voters who are protected by this move (anyone over 54 right now will not have their OAS/GIS benefits affected at all). Young people will continue to pay taxes to support those boomers’ pensions, but then will have two years of their own golden age ripped away from them. The most bitter irony of all is that the cost of OAS/GIS (measured appropriately as a share of GDP) will start to decline in 2030 (according to the most recent actuarial review of the program). 

A.     Assumptions and Methods
The monthly GIS and Allowance top-up benefit increases the benefits of lower-income GIS and Allowance recipients. The top-up benefit is reduced by 25 cents for every dollar of income in excess of $2,000 for single individuals and $4,000 of combined income for couples. Based on data provided by Service Canada and the Canada Revenue Agency, the proportions of beneficiaries who would receive the top-up benefit and their average top-up as a percentage of the maximum top-up have been estimated.

The estimated number of beneficiaries who would receive the top-up benefit is split into two groups: those receiving a partial top-up and those receiving a full top-up. This process was done by type of GIS and Allowance recipients, age, and sex. The estimated proportions are assumed to apply for years 2011 and thereafter.

On average, about 38% of all GIS beneficiaries are estimated to be entitled to either a full or partial top-up. The average top-up for GIS beneficiaries is estimated at $40 per month for single individuals and $55 per month for couples in 2011.Actuarial Opinion

In our opinion, considering that this 10th Actuarial Report was prepared pursuant to the Public Pensions Reporting Act:
- the data on which this report is based are sufficient and reliable;

- the assumptions used are, individually and in aggregate, reasonable and appropriate; and,

- the methodology employed is appropriate and consistent with sound actuarial principles.

This report has been prepared, and our opinions given, in accordance with both accepted actuarial practice in Canada, in particular, the General Standards of Practice of the Canadian Institute of Actuaries, and internationally accepted actuarial practice as provided by the Guidelines of Actuarial Practice for Social Security Programs of the International Actuarial Association.

Table 2 Financial Status of Amended Program Number of Beneficiaries (thousands)

Number of Beneficiaries (thousands)				Expenditures ($ million)						Expenditures as a Percentage of GDP
Year	OAS	GIS	Allowance	OAS	GIS	Allowance	Admin Exp	Total	GDP ($ billion)
2011	4,889	1,752	93	29,468	8,729	582	138	38,917	1,641	2.37
2012	5,091	1,820	89	31,290	9,367	577	143	41,377	1,705	2.43
2013	5,289	1,886	86	33,141	9,857	570	151	43,719	1,770	2.47
2014	5,482	1,957	84	35,022	10,391	568	160	46,141	1,834	2.52
2015	5,679	2,028	82	36,987	10,939	571	168	48,665	1,900	2.56
2020	6,782	2,431	79	49,018	14,388	611	222	64,239	2,322	2.77
2025	8,043	2,849	76	64,967	18,703	655	293	84,618	2,820	3.00
2030	9,302	3,260	61	83,981	23,748	589	376	108,694	3,442	3.16
2040	10,507	3,576	52	118,525	32,232	615	526	151,898	5,191	2.93
2050	11,282	3,580	50	159,723	40,202	731	698	201,354	7,702	2.61
2060	12,159	3,573	41	216,118	50,013	741	929	267,801	11,412	2.35

 The following is also taken from the review

So anyone born after 1965 will have their own access to this important program restricted just as the whole program becomes less expensive! The Conservative plan thus exacerbates any so-called generational inequity in the current system, rather than ameliorating it. (I don’t buy that old intergenerational complaint in any event: the equalizing impact of a generous universal pension system far outweighs any niggling concerns about intergenerational transfers.) This cynical calculation by the Tories was probably intended to short-circuit any repeat of the “Good Bye Charlie Brown” protests that derailed Brian Mulroney’s aborted effort to undermine the public pension system in the 1980s.

Thanks to the appendix tables in that same actuarial review, we can perform an interesting exercise. Table 5 of the review projects average OAS benefits in each year until 2060. From that table, anyone who is under 54 right now can calculate how much OAS benefits they would lose, as a result of having up to their first 2 years of benefits eliminated. The following table reports (in undiscounted dollars) the approximate lost OAS income for people in each age cohort. (For the first few rows in the table, the loss depends on the month of your birth, so these estimates are an average for the full year. People who are 54 right now don’t lose anything; but people who turn 54 later this year will lose partial benefits, and the first row is an average of these effects. For the detailed phase-in schedule see the Service Canada web site.)
 
 Personally I would lose around $14,000. That’s bad enough. But someone who is 20 today would lose over $34,000.

Another painful irony for those near the bottom of the above table: As those above them start to work longer in life to foot the bill of the OAS cutback, their own chances of finding a job will be reduced at the same time. Making old people keep their jobs longer, in a world where youth unemployment is a recognized crisis, has got to be one of the most counter-productive policy prescriptions ever devised. Those trumpeting the measure as a way of fostering higher labour force participation and hence faster GDP growth are still living under the misapprehension that employment is determined by the number of available workers; in fact, of course, employment is determined by the number of jobs.

In sum, it is clearly today’s young people who would be the real losers from this move. So instead of a Good-Bye Charlie Brown repeat, I think we need a more youthful cartoon anaology: perhaps a gang of anime crusaders with enough foresight to be furious that they will be denied access to a system that they themselves paid for. They will storm the Harperite ramparts to defend a system that is strong, affordable, and fair. This government is many things, but it is not stupid. A forceful pushback against this hurried, ill-considered retrenchment of a crucial public program could actually win.

Is Retirement in Canada ‘endangered’

Stephen Harper seems to think that it should be, or at least the government’s role in funding retirement should be reduced or eliminated and is in question.

The government has told the Canadian people that we are in good shape as a country, yet tells the world that we need to make adjustments to our pension program to better weather the current and future economic storms.

The current recession has taken a toll on the financial health of many and retirement savings, which were not adequate for many prior to this current recession, have many of us considering our retirement options. Options we have to start thinking about include continuing to work, working part-time, selling our homes, cutting expenses on food, shelter or health related expenses.  

There are several things that the government needs to consider fixing, Old Age Pensionis one of these items so people will begin to feel confident in the viability of the system, another is to set up a system that encourages younger Canadians to pay more into RRSPs and to start to give more effective advice to retirees that helps them use their financial assets most effectively when they retire.

In the United States, improvements in health of older people and increases in average life expectancy were given as primary reasons for increasing the retirement age.

“It’s time to once again raise the full retirement age, according to Bob Reynolds, the president and CEO of Putnam Investments. This time, Reynolds suggests, we might peg the full retirement age to life expectancy so as to adjust for improvements in the health of older people and increases in average life expectancy.

In 1940, for instance, the average 65-year-old male in the U.S. had a life expectancy of 77.7. In 1990, it was 80.3. And by 2006, it was 81.6. “You have to adjust for that,” Reynolds said. “It’s just too costly.”   If you use the 1940 as the benchmark ratio, the full retirement age could be raised, by to 71 according to Robert Powell of the Wall Street Journal

Reynolds goes on to suggest that there’s a correlation between financial literacy and confidence. To solve the confidence problem, we must solve the literacy problem. According to Reynolds, it’s time to provide the education and tools required to help people understand how much to save and how to invest, how much they will need to accumulate for retirement, and how to make their money last a lifetime once in retirement. Knowledge will lead to action, and action will lead to confidence.

I tend to agree that increasing ones understanding of financial literacy is important to help people prepare for retirement. Anyone looking ahead to retirement may benefit from a written financial plan that will help them define their retirement goals and objectives, and guide them in creating a realistic plan to create a more confident financial future

As Mr. Harper has publically stated that Pension reform read reduction in the dollar amount paid to pensioners or increasing the age at which one qualifies, or both) is one of his governments agenda items he will find that it may have been prudent of him to give us  an idea that Pension reform was on his agenda  prior to the last election. As more and more baby boomers retire, the discussion on retirement, on retirement income, will become a national topic, and the way Mr. Harper has introduced this topic, I think will spark the interest of retirement to all age groups.

Let’s hope that’s the case because the problem is real and we need to have a discussion about the issues, we don’t need to be blindsided by a government that apparently now believes it has a mandate to move Canada to a more right wing social conservative agenda. The social conservative agenda I believe, wants sto put more responsibility on the individual for their own safety net, while the  maintaining government has no responsibility for any safety net for its citizens.