RSPs and the new PRPP put pension savings at mercy of banks and brokers.
by Dave Coles
While most Canadians are appalled by the privately run US healthcare system we tolerate a pension system based on similar principles.
The USA’s private health insurance model is expensive, inequitable and not very good at keeping people healthy. It can also be a significant competitive disadvantage for exporting companies, which must pay their employees’ exorbitant health costs.
Fewer than 40 percent of working people have an employer pension plan, with that rate dropping below 25 percent in the private sector.
Despite the clear benefits of single-payer government-run health insurance, the insurance industry is able to keep that obvious solution off the US national political agenda. To avoid challenging big insurance companies, US politicians perform all kinds of bizarre policy gymnastics — as demonstrated by the 2010 “Obamacare” health reforms, which made health insurance compulsory and appeared to support inefficient private health coverage.
While we look aghast at the damage caused by private health insurers south of the border, Canadian retirees face similarly bleak prospects as a result of banking and insurance companies pushing private pension solutions despite the obvious benefits of expanding our existing public option.
Today, one in seven retired Canadians receives less than $700 a month in income while a third bring in under $1700. Fewer than 40 percent of working people have an employer pension plan, with that rate dropping below 25 percent in the private sector.
Many of those lucky enough to have an employer pension have seen their benefits slashed in recent years. Tens of thousands of Canadian retirees have lost up to 50 percent of their pension during bankruptcy filings.
Fledgling businesses, especially in the forestry sector, have had a hard time fulfilling their pension obligations, due to historically low interest rates and investment returns. It’s almost reached the point where the solvency rules meant to protect pensions are having the opposite effect and actually pushing companies into bankruptcy.
Simply put, the privately managed pension system in Canada is failing millions of retirees. Yet the Conservative government’s response to this crisis has been to strengthen the role private interests play in retirement. They’ve raised Old Age Security eligibility from 65 to 67 years of age and established the Pooled Registered Pension Plan (PRPP), which is another type of financial institution run pension plan.
“Turning over more of Canadians’ retirement savings to insurance companies and the financial sector is a recipe for continued lost savings and insecurity.”
In criticizing PRPPs the Canadian Labour Congress noted: “Turning over more of Canadians’ retirement savings to insurance companies and the financial sector is a recipe for continued lost savings and insecurity.” Some have called PPRPs “tarted-up” RRSPs, which, of course, are financial institutions’ preferred form of retirement savings plan because of their profitability.
These profits are dependent on the more than $10 billion a year in federal tax subsidies for RRSPs — subsidies that heavily favor upper income Canadians who benefit from the pay-tax-later nature of RRSPs.
Financial advisors spend more than $100 million a year on RRSP-related advertising, sometimes prodding low and mid income individuals into buying RRSPs even when they would be better off without an RRSP — since during retirement, the added savings will be clawed back from government pension income.
As is the case with most employer pension plans, RRSP administration fees are two or three times those of the Canada Pension Plan. (The long period over which retirement fees and returns compound means that a 1 percent fee will reduce savings by 20 percent to 28 percent over a lifetime.)
As is the case with most employer pension plans, RRSP administration fees are two or three times those of the Canada Pension Plan.
While promotion costs and fees eat into RRSP savings, the CPP is so efficient that it’s possible to double pension benefits by having employees and employers save slightly less than 3 percent more of their salaries.
Recognizing this mathematical mircale, the Canadian Labour Congress has called for doubling CPP benefits by gradually increasing workers’ and employers’ contributions over a seven-year period by 3 percent of wages. If this system were in place today, the result would bring the maximum CPP benefit to approximately $24,000 per year.
We should also increase Guaranteed Income Supplement payments to low income seniors by at least 12 percent. The $1 billion cost can be covered by a 10 percent reduction in RRSP tax breaks.
A greater reliance on the CPP and GIS is the most efficient way to ensure that all Canadians have a reasonable standard of living during their golden years. But insurance and banking interests, who profit from the current model, will oppose these changes, which will displace some RRSPs and employer pension plans.
In 2010 Finance Minister Jim Flaherty agreed to, and then rejected, a small increase to the CPP after the Canadian Bankers Association and Mutual Fund industry pushed back.
Maybe if we weaken our financial industry’s grip over pensions this will help Americans see through their own private health insurance mess. As the RRSP season draws to a close, now is a good time to compare Canada’s retirement system to US healthcare.
About Dave Coles
Dave Coles is President of the Communications, Energy and Paperworkers Union of Canada.
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