Financial advisors have been intensely critical of recently announced plans to expand state pension plans at the provincial level in this country. Politicians, worried that citizens haven’t saved enough for retirement, are pushing to expand state-sponsored retirement plans. Advisors, rightly, have been up in arms.
The new paycheque deductions necessary to fund a stand-alone Ontario pension plan will punish those who did save enough for retirement, while those who didn’t save enough will enjoy contributions from those who did. No wonder the idea of a new Ontario pension fund has drawn howls of derision from advisor—for many wealth professionals this is simple expropriation by the government of private wealth that is the lifeblood of the advisor industry.
For those who argue against the plan, the C.D. Howe Institute released a report last week that provides the naysayers with some ammunition.
There is, or is not, depending on who you talk to, a retirement crisis brewing in this country. According to some, too few Canadians have saved enough money to retire, and so many citizens face a post-retirement disaster. As a result, Ontario is going ahead with a plan to create a new provincially-based pension plan that would bulk up retirement benefits. According to supporters of the plan, workers have failed to willingly save enough for retirement on their own. The massive amount of “unused” RRSP contribution room—hundreds of billions, apparently—is cited by the government as a reason the state needs to expand obligatory retirement savings solutions targeted to those who have no savings.
In a report released last week, C.D. Howe Institute analyst, Alexandre Laurin, pushes back against the claims. He explains that the claims of tragic “undersaving” by Canadians in their RRSPs is not quite as large as supporters of the pension plans assume.
The report notes that assumptions about unused RRSP room have driven the acceptance of the so-called OPP. But Laurin explains reality is not exactly as assumed. "Every year, mostly around tax filing season, we hear that the stock of unused RRSP contribution room is staggeringly high, and growing," he says. Not quite.
According to Laurin, estimated participation rates would be much greater if Canadians "who are not and should not be RRSP contributors" were excluded from the data. That is, there are vast numbers of low and moderate income earners for which pension income from government sources will suffice to replace a significant portion of yearly income they earned when working. These people will not need RRSP, as they are already covered under existing government plans. Taking this group out of the data reduces the total number of those who are "not contributing."
Dropping that group from the data, the real story is that, of those “who should be contributing to an RRSP to maintain their current lifestyle, nearly half did so in 2013.” Of this group, almost half contributed more than 10 percent of earnings on average, a much higher figure than broad average statistics would lead us to believe."
Laurin also points out that, on average participation and contribution rates with respect to RRSPs increase with age. So as the population ages, more RRSP contributions will be made. More than 60 percent of average- to high-income earners aged 45 and older contributed to their RRSP. The conclusion according to Laurin, is that, though, "RRSP utilization may still be lower than some would consider socially optimal” it is not to the extent widely believed, and not to the point of “establishing a strong case for a major public-pensions overhaul...There are options available to encourage more private savings among those most in need of it.”
“Fairly good RRSP take-up rates, on the part of those for whom such savings are beneficial… suggests that the case for remedial action, in the form of supplemental forced savings plans, is weaker than widely assumed,” reads the report.
"It is time someone look at the data and make some points," said Laurin, in an interview with WP. "Some people won't need much. For those who really need RRSPs, the employed who earn more than 50,000, the take up rates are not as low as thought. The average contribution rate is higher than many say. Forcing a pension plan is 'over killing' the problem. The case for a new state pension plan is weaker than the case that has been made. Maybe Premier Wynne has a point; but this research suggests the case is weaker than thought. There are many who haven't saved enough. But I just think there is a need to be accurate when we talk about these things. Every time we start discussing the proposal, these points come up. But usage is higher than we sometimes think," said Laurin.
Stephen Harper, famously, smirked when Wynne brought the idea up in a meeting between the two. No wonder.