There’s been a simmering but occasionally vociferous debate over the last few years about how to solve what some see as a looming retirement crisis in Canada.
You see, a lot of us aging Baby Boomers have not saved enough money for retirement. As a result, many people will be heavily dependent on government programs and a burden on society, exacerbating the inevitable demographic tilt toward fewer workers trying to support more retirees.
To oversimplify, there are two extreme sides of the debate and two opinions on possible solutions.
One side believes that the government has to look after people by making sure that they participate in mandatory retirement programs, such as an expanded CPP or mandatory corporate pension plans. This side also suggests that corporations and employers should be forced to take a bigger role and responsibility for their workers’ retirement incomes.
The extreme of the other side would suggest that everyone has access to the information needed to determine how much they have to save for their own retirements, and everyone who is able and capable has the responsibility to take care of themselves. If a few people choose not to do that, everyone else should not suffer by having to participate in a government-enforced mandatory retirement plan.
In Aesop’s fable terms, the second group would describe the first group as the grasshopper, and describe themselves as the hard-working ant, who puts away adequate food for the winter.
Last week, the Minister of State for Finance announced that the federal government will be holding consultations on their latest idea on how to partly solve this issue. This is referred to as a “target benefit plan”, and would initially be available to all Crown corporations and federally regulated private companies. (That includes banks, transportation and telecommunications companies.)
The target plan is a bit of a hybrid between the traditional Defined Benefit (DB) pension plan and the Defined Contribution (DC) pension plan.
Based on a small amount of information, my read of this “target” plan is that it is essentially a DC pension plan, but: managed by an employer-employee management group.
Similar to conventional DC plans, it is the contributions that are defined, not the amount of the future benefit. The contributions will be designed to provide a certain retirement benefit (the target), if the investment return assumptions are met.
However, if the actual investment returns are lower than the long-term assumption, the joint committee could reduce benefits, increased contributions, or some combination of the two.
This is an improvement from conventional DC plans, which simply provide for each worker whatever retirement income is available from the accumulated fund in his or her account.
However, employees and labor groups would say that this is a significantly less attractive option than current DB plans, which guarantee a certain amount of retirement income per year of employment, and leave the employer 100% responsible to make up any deficit.
A number of provinces have approved such a plan already in their jurisdictions, and Ontario is championing a new mandatory government retirement plan for participating provinces, because Ottawa has rejected the idea of a mandatory expanded CPP.
It’s going to be interesting to see how all this shakes out.
My advice to you? Make sure you take care of your own retirement plans and put aside adequate resources to take care of yourself. Be the ant, not the grasshopper, and you won’t be at the mercy of anyone else.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.