Canada, unlike France and the U.S., is not dealing with a pension crisis: Keller

In an opinion column for The Globe and Mail, Tony Keller explains why Canada isn’t having a crisis with its pension system like France and the United States are.

In France, he writes, there are protests in the streets and strikes over plans to raise the national retirement age to 64 from 62. In the U.S., he writes, there’s a “quiet… slow motion” crisis as Democrats and Republicans fail to agree on steps to stabilize the U.S. Social Security system.

“The Congressional Budget Office says that unless premiums are raised, the deficit is increased or taxpayers kick in cash, pension benefits will have to shrink 23 per cent by 2033,” Keller writes, noting that the Social Security system “continues to wend its gentle way toward the iceberg.”

There’s no crisis here, he says.

“Canada is not having a pension crisis. You may not have noticed. ‘`Absence of Crisis Expected to Continue Indefinitely, Experts Say’ is not a headline we tend to put on the front page,” he writes.

That’s because actions taken decades ago stabilized our system, Keller explains.

“Back in the 1990s, Canada was headed for a crisis. The Canada Pension Plan (CPP) (and the parallel Quebec Pension Plan (QPP)) had been created three decades earlier, and like most public pensions they were built on a pay-as-you-go model. CPP premiums deducted from workers’ paycheques paid retirees’ pensions, and once you retired, the next generation of workers would pay your pension. The CPP was a chain of intergenerational IOUs,” he writes.

The French and American systems also operate under the “pay-as-you-go” model. But such systems run into problems when there are fewer workers than retirees. Here in Canada, 19 per cent of us were seniors as of 2021; in France it is 21 per cent, Keller explains.

You have to change things up when demographics change, Keller contends.

“In the 1990s, then-Finance Minister Paul Martin and his provincial counterparts chose to face the arithmetic. They gradually doubled CPP premiums, to ensure that promised pensions would be paid, today and tomorrow. To make that possible, a large chunk of premiums now go into a savings account. The Canada Pension Plan Investment Board (CPPIB) manages the growing pile, which at the start of this year stood at $536-billion. Your premiums today partly fund your retirement tomorrow.”

This is a somewhat complex concept, but what it means is that we are still operating a “pay-as-you-go” system, but when we get to the point when there are not enough workers to pay for the pensions of retirees, money in the CPPIB cookie jar will be tapped into until the ratio returns to a sustainable level.

Keller’s article goes on to note that the Old Age Security (OAS) system, which is paid entirely out of tax dollars rather than employer and member contributions, has the potential for problems in the future; its costs keep rising as the senior population grows. One way to save money on OAS would be to increase the so-called “clawback” so only those seniors needing OAS the most would get it.

CPP was intended to supplement the workplace pensions Canadians were supposed to have; increasingly, workplace pensions are becoming less common. And OAS was designed for those who did not work (and contribute to CPP) during their careers. For a lot of people, CPP, OAS and even the Guaranteed Income Supplement are all they have to live on in retirement, and it’s a pretty modest living.

If you don’t have a workplace pension, there’s a great made-in-Saskatchewan solution out there for you — the Saskatchewan Pension Plan. SPP is a voluntary defined contribution pension plan that any Canadian with registered retirement savings plan (RRSP) room can join. Employers can also offer it as a workplace benefit. Contributions made to SPP are professionally invested in a pooled fund at a low fee. SPP grows the savings until retirement time, when options for turning savings into income include a stable of annuities. Check out SPP today!

And there’s more good news! Now, you can contribute any amount to SPP each year up to your RRSP limit. And if you are transferring money into SPP from your RRSP, there’s no longer an annual limit! Saving with SPP for retirement is now limitless!

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The pension industry has a big footprint.

With the top 300 pension funds around the world managing an eye-popping $19.5 trillion (U.S.) in assets – and with quite a few of those funds being Canadian-based – Save with SPP decided to take a look around to see what our own country’s pension leaders are saying about investment markets.

With $409.6 billion in assets, the Canada Pension Plan Investment Board (CPPIB) is the nation’s largest pension fund. CPPIB has identified four sectors of the economy it thinks will grow in the near future – e-commerce, healthcare, logistics (aka shipping/receiving) and urban infrastructure.

CPPIB expects “massive changes” in those areas, CPPIB’s Leon Pederson tells Tech Crunch. And while CPPIB invests for the long-term, the four areas identified by their research might “indicate where the firm sees certain industries going, but it’s also a sign of where CPPIB might commit some investment capital,” the magazine reports.

The $205-billion Ontario Teachers’ Pension Plan (OTPP) saw small losses in the first half of 2020, reports Bloomberg.

“Some of our hardest hit investments were among our private assets. Heavily-impacted segments were leisure and travel, including our five airports, and assets where consumer spending declined, which is our shopping malls and Cadillac Fairview,” OTPP’s CEO, Jo Taylor, states in the article.

However, losses were cushioned by the plan’s strong fixed-income returns, the article notes – in all, $7.9 million in income from its bond portfolio helped OTPP limit losses.

The $94.1 billion Healthcare of Ontario Pension Plan’s (HOPP) CEO, Jeff Wendling, recently told Benefits Canada that the plan is considering looking at some new investment categories as it pursues its “liability driven investing” strategy. With a liability driven investing strategy, the investment target is not beating stock market indexes, but ensuring there is always enough money to cover every current and future dollar owed to pensioners.

“We’re very focused on liabilities, but what you do when interest rates are at really extreme lows, in our view, is different than what we did in the past,” he states in the article. HOOPP, he adds, is now looking at infrastructure investing, insurance-linked securities, and increased equity exposure to generate income traditionally provided by bonds.

Large pension plans like CPPIB, OTPP and HOOPP have enjoyed a lot of success over the years. The takeaway for the average investor is that the large scale of these plans allow them to do things the average person can’t – like directly owning businesses (private equity), or shopping centres and offices (real estate) in addition to traditional stock and fixed-income investments. The big guys are taking advantage of diversification in their holdings, and so perhaps should we all.

Individuals and workplaces can leverage the investment expertise of the Saskatchewan Pension Plan. Its Balanced Fund is invested in Canadian, U.S. and international equities, bonds, mortgages, and real estate, infrastructure and short-term investments. And the fund has averaged an eight* per cent rate of return since its inception in the mid-1980s. Check them out today.

*Past performance does not guarantee future results.

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A look at the best of the Internet, from an SPP point of view

Retirement system OK, but more needs to be done: study

It’s a classic “good news, bad news” situation, this Canadian retirement system of ours. The good news, according to OECD research published recently in Wealth Professional, is that the developed world’s pension systems are much more stable.

The bad news is that they’re not necessarily delivering an adequate retirement benefit, the magazine notes.

“Governments are facing growing challenges from an aging population, low returns on retirement savings, low growth, less stable employment careers and insufficient pension coverage among some groups of workers,” the article notes. “These challenges are eroding belief that pensions will provide enough income for comfortable living in retirement,” the article adds.

While Canada’s system is ranked sixth best among those studied, the article points out that Canadians contribute about 10 per cent of their earnings towards government retirement programs. By comparison, Italians contribute about 30 per cent of earnings, the article notes.

There’s no question that the CPP is on much more stable footing than in years past. The giant CPPIB fund, as of mid-2018, had $366 billion in assets and had an investment rate of return of 11.6 per cent, according to a media release.

But the CPP payout, while being improved, is currently quite modest. The maximum monthly amount as of July 2018 was $1,134.17, and the average amount paid out to new CPP retirees was $673.10. The great thing about CPP is that it continues for the rest of your life and is inflation protected.

Most of us will also get Old Age Security payments, which are currently around $600 a month. This is also a lifetime benefit.

What the studies are telling us, however, is that if we don’t have a workplace pension, we need to be saving on our own for retirement. CPP and OAS were designed to supplement your workplace pension and personal savings. Many of us don’t have pensions at work, and a surprising number of us don’t have any retirement savings either.

If you are in that situation, there is still time to take action. If you don’t have a pension at work, you can create your own by joining the Saskatchewan Pension Plan. You can determine how much to contribute up to a maximum level of $6,200 a year.

If you have dribs and drabs of RRSP savings in other places, those can be consolidated in the SPP (up to $10,000 a year).

Not only will SPP invest that money for you, but at the time you want to retire, they’ll convert it into a lifetime monthly pension. By creating your own retirement income base, those helpful government benefits waiting for you in your future will be icing on the cake, rather than the cake itself.

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. After a 35-year career as a reporter, editor and pension communicator, Martin is enjoying life as a freelance writer. He’s a mediocre golfer, hopeful darts player and beginner line dancer who enjoys classic rock and sports, especially football. He and his wife Laura live with their Sheltie, Duncan, and their cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22