Fixing the pension crunch before it's too late

Canadians are worrying about pensions these days.

But for the most part, the worrying isn't translating into much constructive action. The B.C. government deserves credit for leading a push to change that.

The concern is understandable. Once people could count on workplace pension plans and basic government pensions to cover a relatively short retirement.

But companies have been getting out of the pension business and trimming benefits. Private pension plan coverage peaked two decades ago; today, only 25 per cent of British Columbians have a workplace plan.

RRSPs were supposed to encourage people to save on their own. But personal savings rates have been falling since 1982. (Although home equity is a source of retirement income for many.)

The core problem is that our system of retirement incomes hasn't evolved with these changes.

Canada's current pension system rests on three pillars.

Basic public pensions are paid from tax revenues and are intended to keep people from the grimmest poverty.

Old age security and the guaranteed income supplement together provide about $1,170 a month for people with no other source of income. (Which is, it's worth noting, about 30 per cent more than a disabled person is supposed to survive on under B.C.'s income assistance program.)

The Canada Pension plan is the second pillar. It provides defined benefits for people who have worked based on their contributions over their careers. The highest benefit is about $935 a month.

Those public pensions are relatively poor compared with other developed countries. But that mattered less when working Canadians could count on a plan through their employer or union and their own savings.

An analysis done last year found middle-income Canadians face the greatest retirement crunch. Poor people experience a relatively small drop in post-retirement income because they already don't have much. Rich people tend to have savings and workplace plans.

Those in the middle face the steepest decline in income.

Time is running out for action. The big bulge of baby boomers is heading toward long retirements.

This is not just a problem for them.

Remember, for example, that the basic old age pension is paid from current tax revenues.

Back in 1971, there were 6.2 British Columbians of working age for every person over 65. Today, the ratio is 4.3 to one. And by 2034, there will be 2.4 people of working age for every person over 65.

So in 1971, six people of working age shared the cost of providing the basic pension for one retiree. In 2034, just 2.4 people will be sharing the cost. That's a greater burden. And the political clout of the baby boom gang could lead them to pressure politicians to bump up pensions at the same time.

Premier Gordon Campbell has promised improvements. In October 2008, he made pension reform the second item in his 10-part plan to respond to the global economic crisis. B.C. was prepared to push ahead on its own if a national agreement couldn't be reached, he said.

Progress has been slow, but that's not surprising. The issues are complex.

Campbell's proposal would see a new voluntary pension plan created. There would be no tax benefits and employers could choose whether to contribute. Pensions would be based on the amount of money contributed.

Which sounds much like an RRSP without the tax breaks.

But there would be advantages. The fund would be managed by existing public sector pension management agencies. That would mean participants would avoid management and sales fees, which can eat up RRSP and mutual fund returns.

And there would be safety and security for people contributing to the plan.

But it's far from the only option. And deciding on the plan is not even the first question. The starting points should be what kind of retirement income are we striving for and how we believe responsibility should be shared.

I'll look at that in a future column - but not until after the budget.

Footnote: The provincial government has started consultations on pension reform. It has useful background here and people have until the end of March to offer comments.