Bob Baldwin is one of Canada’s foremost experts on pension policy. He spent many years with the Canadian Labour Congress, as Director of Social and Economic Policy. He is a Director of Addenda Capital and Tradex Management Incorporated, he chairs the Board of Trustees of the Canada Wide Industrial Pension Plan, he is an advisor to the National Pension Hub of the Global Risk Institute and is a member of the expert panel on Income Security of the Ottawa Council on Aging. He has been a member of the Board of Directors of PSP Investments; a member and Chair of the Canada Pension Plan Advisory Board.

When he was recently named Chair of the CD Howe Institute Pension Policy Council, we asked him about Canada’s retirement income system.

 Citing the OECD Pensions at a Glance reports, as well as Melbourne Mercer assessments, he places Canada in the “upper middle” of the OECD countries. Canada’s system is a mix of Old Age Security, Guaranteed Income Supplement; the Canada Pension Plan, private workplace pensions and private savings (RRSP’s).

 We get good marks for protection of those at the low end of the income scale. People with no income and those who have worked most of their lives at minimum wage levels, will generally see their income stay steady or even increase in old age.

 Our public sector workplace pension plans also get high marks for providing good income replacement, inflation protection, and the ability to retire after 30-35 years of service. And they have a bridging provision which provides the equivalent of their CPP payment until they reach 65.

 Weaknesses in the system:

The earnings replacement at retirement is not as good for middle and upper earners in the private sector, especially for people working for small organizations and enterprises. In the private sector overall participation rates in workplace pensions has declined and there has been a strong shift to DC plans. Unfortunately, the contribution rates to the DC plans are often too low to provide adequate incomes. There are also some transparency problems with DB plans.

 Inadequate benefits from workplace pension plans may be reflected in later retirement rather than lower incomes.

 Baldwin also notes some shortcomings in the management of the retirement income system as a whole.  Most importantly, components of the system tend to get dealt with one by one rather than on a holistic, system wide basis. But there are important interactions among components and the tax system. An example of the problems this can create is the recent increase in CPP benefits. Low earners will get little out of this initiative because of interactions with the GIS and provincial top-ups where they exist.

 Overall he feels that the Melbourne/Mercer mark of a “high B” is appropriate. He points to the Netherlands and Denmark for “A-level” systems. 

 For the future:

The declining availability and participation in workplace pensions is a concern As well. the clear shift in the private sector from “defined-benefit” to “defined contribution” plans reduces the security of knowing that your pension will be a certain percentage of your earnings, depending on the number of years of contribution.

There has recently been some interest in making “deferred life annuities” available to people in DC plans. Deferred life annuities can address the worry that people will run out of money at an older age.  For example, they could purchase an annuity that begins to pay them at age 80.

On the upside, the increased participation of women in the labour force has clearly improved the pension situation of women and two earner couples.

As for small businesses and nonprofit organizations, he recommends that they definitely band together to form multi-employer plans. Larger plans have some advantages in cost of management, and sometimes, in the potential for stronger governance.

He offers qualified support for the recent expansion of CPP benefits and contributions. This will begin to provide adequate income replacement for people earning up to about 2/3 of median wages. But he cautions that OAS and GIS should be continuously upgraded in pace with wage and salary growth. Otherwise the ability of OAS and GIS to provide minimum income protection and earnings replacement will be eroded. The earnings replacement role of OAS is particularly important for low earners.

Social Canada will be following up this article to look more closely at options for small businesses and nonprofits to offer effective retirement security packages to their workers.