Canadians retirement system creaking as population ages

They’re known as the Golden Years, though pension experts are warning that for many Canadian retirees they’re about to lose their lustre.

Personal savings are falling short, company pension coverage is declining, and there’s a widening gap between public and private sector benefits. Add to that a rapidly aging population and the country may be facing a pension crisis, they warn.

The government is studying the problem, though so far hasn’t come up with a solution.

“There have been three expert committee reports over a period of years and we do not seem to be any closer to structural reform that will give people a decent retirement income,” said James Pierlot, a lawyer and senior consultant at Towers Watson.

“The track we are on now means that people are going to be poorer in retirement and the government will have to support them. It’s a generational time bomb."

According to Statistics Canada, the proportion of people aged over 65 to the rest of the population hit a record 13.9% in 2009. That figure will expand to about 25% by the end of the 2030s as baby boomers retire.

One-third of Canadians now between the ages of 45 and 64 are likely to end up with a pension that falls short of "adequate minimum incomes," it said.

Some private studies are even more pessimistic, putting that figure at two-thirds.

It’s not a problem that’s likely to affect low-wage earners. A combination of the Canada Pension Plan, Old Age Security and the Guaranteed Income Supplement will replace about 76% of their pre-retirement incomes.

Neither will it affect the public sector. They are still covered by generous plans, backstopped by the taxpayer, that still offer the security of defined benefits.

Those feeling the pinch are likely to be the middle class in the $30,000 to $100,000 income bracket.

So what’s going wrong? The experts say nothing when it comes to the OAS, GIS and CPP (QPP in Quebec), two of the three pillars of the country’s retirement income system. The CPP is adequately funded for 75 years to come, without an increase in contributions.

It’s the other pillar – the corporate sector and private savings – that may be crumbling.

About three-quarters of Canadians have no corporate pension plan and are relying on vehicles such as RRSPs to fund their retirement needs. Of those who do have plans, very few have the security of defined benefits.

Overall defined plans have dropped from 44% of the workforce in 1992 to about 34%, with 77% of that decline in the private sector.

“A lot of employers don’t want to take on the risk of defined benefit plans,” said Bruce Moir, senior product manager at ScotiaMcleod. “Look at the example of General Motors – it has fewer workers paying in contributions to support obligations to an aging workforce amongst volatile markets – it’s no wonder companies run away.”

What’s the answer? Many pension experts say the government needs to reform the tax system to encourage more private saving, such as abandoning annual RRSP limits in favour of a lifetime lump sum maximum, or increasing the age limit for contributions from its current level of 71 years.

Another proposal is to open up the pension system to allow investors greater access to professionally managed funds with lower fees and better returns than those available on products such as mutual funds, where most Canadians put their cash.

Though experts concede this may not work.

“There’s a phenomenal amount of unused RRSP room, and that begs the question as to why given the opportunity Canadians aren’t saving,” Moir said.

“Maybe it’s that the cost of living has gone up.”