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Banks Call for Changes to Pension System By Jonathan Chevreau, Financial Post
Canada
Two major Canadian financial institutions are issuing calls today to overhaul the retirement income security and pension system. Reports and recommendations from TD Economics and BMO Retirement Institute were issued in advance of the June 13th meeting of federal, provincial and territorial ministers in Prince Edward Island.
A 23-page Special Report from TD Economics chief economist Craig Alexander urged that reform be rushed “prudently” but not blindly. While there may be no pension crisis in Canada at the moment, it reinforced prior findings that millions of middle-income workers without employer pensions are the most vulnerable – especially those with pre-retirement earnings of $30,000 to $80,000. It says 20 to 25% of current retirees are not able to replace an adequate amount of their pre-retirement income.
That’s in contrast to a solid safety net for the poorest seniors, who are easily able to replace most of their working years’ income through the “first-pillar” government programs of Old Age Security and the Guaranteed Income Supplement.
TD looks at several current proposals that aim to help pensionless middle-income workers through enhancements to the “second” pillar: the mandatory Canada and Quebec Pension Plans (C/QPP). Rather than expanding or supplementing C/QPP, TD leans to a public supplementary DC (Defined Contribution) pension plan with a default opt-in provision. “I favor that one unless we come up with a structure that lets employers do the same with private plans,” Alexander said in an interview.
He does think reform is needed to improve solvency for current DB pensions and that the current provincial pension regime should be harmonized, in the absence of sweeping reform, Alexander thinks tweaks of the existing system would help: notably by raising contribution limits for RRSPs, the new Tax Free Savings Accounts and DC pension limits. The goal would be to make it possible for those without employer pensions to save as much as those with Defined Benefit pensions, he said. This is similar to recommendations by the CD Howe Institute and the Investment Funds Institute of Canada that RRSP contribution limits be almost doubled from 18% of earned income to 34% and the contribution ceiling move from $22,000 to $42,000.
TD also says a national financial literacy strategy should be implemented. The Finance Department has already set up a Financial Literacy Task Force but “we need to see that carried further,” Alexander said, “To this point, the government is to be commended on this.”
BMO Retirement Institute’s Tina Di Vito sees similar potential in leveraging the existing third-pillar system of private savings encouraged by government tax incentives: an aging population with longer life expectancy would be best served by raising or even eliminating the RRSP age limit, currently 71.
BMO has already successfully lobbied for tax-free rollovers from RRSPs or RRIFs to Registered Disability Savings Plans and is now calling for the ministers too consider creating a new Registered Medical Savings Plan or RMSP.
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