Winnipeg Free Press - PRINT EDITION

In retirement, be the ant, not the grasshopper

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There's a simmering and occasionally vociferous debate 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 depend heavily on government programs, 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 the government has to look after people by making sure they participate in mandatory retirement programs, such as an expanded CPP or mandatory corporate pension plans.

This side also suggests corporations and employers should be forced to take a bigger role and responsibility for their workers' retirement incomes.

The extreme on the other side would suggest 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 the federal government would hold 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 would be 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, increase contributions, or both.

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 labour groups would say 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 per cent responsible to make up any deficit.

A number of provinces have already approved such a plan.

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.

 

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.

 

David Christianson, BA, CFP, R.F.P., TEP, CIM is a financial planner and adviser with Christianson Wealth Advisers, a vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.

Republished from the Winnipeg Free Press print edition May 2, 2014 B12

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