The third edition of HOOPP’s Pensions in Perspective newsletter is available, bringing to the pension conversation insight into innovative ideas on how to provide adequate pension income in retirement. The edition includes the following article by John Crocker, (former) HOOPP President & CEO
By John Crocker
Dec. 19, 2011 – Over the last three decades – including 10 leading the Healthcare of Ontario Pension Plan – I’ve been helping people save for retirement.
But in the past 20 years or so, we’re seeing a shift away from having stable, adequate workplace pension plans for Canadians. Good workplace pension plans – ones that provide workers with a specified benefit, defined by their earnings and years of membership in the plan – have all but disappeared in the private sector, and in many jurisdictions, are starting to disappear from the public sector.
This is a terrible trend. Workers who don’t have adequate pensions are starting to outnumber those who do. Worse, those who may not have adequate pension coverage aren’t aware that what they have won’t provide enough money for them to retire.
Last year, HOOPP paid the average starting pensioner about $18,400. Someone retiring at 60, and living for 25 years, would receive $460,000 in pension payments – to keep this example simple, we’re not factoring in future inflation increases.
If you’ve got a defined contribution plan (DC) or an RRSP, that $460,000 is a target to shoot for. That’s how much you’ll need to save to provide yourself with $18,400 per year.
Let’s deal with RRSPs first. The average Canadian is only putting away about $2,730 a year, according to Statistics Canada – and there was nearly $600 billion in unused contribution room at the start of 2009. If you put $2,730 away for 30 years, you will have invested $81,900 – you would need a 500% return on your investment to get to $460,000.
It’s hard to imagine someone getting those types of returns when the Toronto Stock Exchange’s rate of return is only about six or seven per cent per year, on an historical average.
If you are in a DC plan, and the employer matches, you’ll probably be able to put more away, but you’ll still need to be a very savvy investor. Someone making $50,000 a year for 30 years in a 5% match DC plan would get $5,000 a year in their savings plan, and $150,000 invested after 30 years. You’d still need to triple your money to have enough to retire.
And before someone suggests that you can get there picking stocks, let’s remember that nearly all RRSPs and DC plans invest in mutual funds. Those funds typically charge 1.5 to 2.5% fees, year after year, whether you gain or lose money in their fund. David Pitt- Watson of the UK writes that a mutual fund charging 1.5% a year erodes the value of the assets by a staggering 30% after just 20 years.
As many of you may know, I will be retiring at the end of the year. So as the sun sets on my career, I want to make one final observation. Making hard-working Canadians look after their own retirement savings, or putting them in plans that simply don’t save enough, will, as referenced in the article Pension Freedom Further Away published recently in the National Post, will create some new notions in our future. We’ll be hearing about people either retiring on far less than they expected, or having to work longer than planned to be able to afford to retire.
This is a shame. The answer is staring us in the face. Rather than dismantling good workplace pension plans that provide a pre-defined benefit, we should be expanding them. There’s no savings in cutting back on pension benefits. Throwing an inadequate amount of money at the problem of retirement today simply means that in the fairly near future, we’ll face the same situation now being felt in Australia, where workplace plans were converted from defined benefit plans to DC “supers.” Half of Australian seniors live below the poverty line, and a third of them run out of savings from their DC plans by age 75. Reliance on the government for social programs is growing.
The old saying about teaching someone to fish so they can feed themselves for life applies equally to pensions. Creating plans that can sustain people for life is a boon for society – seniors are independent and live with dignity. Putting money into ill-conceived savings ventures with no target denies them of that security and independence, and makes them dependent on others. We’ve got to do the right thing and improve workplace pensions, or else the problem of inadequate retirement savings will one day come home to roost.