It's no secret Canadians are facing a retirement problem. Ample news reports, studies and warnings from our own governments caution us of an impending nightmare scenario.
There's been a heck of a lot of fretting and debating about what to do.
But Jim Leech, CEO of one of Canada's largest pension funds -- the Ontario Teachers' Pension Plan -- says the time for debate is over. It's time for action, and he recently co-authored with Globe and Mail business reporter Jacquie McNish a book on the subject, titled The Third Rail: Confronting our Pension Failures.
The authors not only describe the causes of the impending crisis and its potential consequences, they offer solutions to avert the disaster.
"We sat down at the beginning and said, 'We really need to be able to engage more people in the discussion -- real people -- and not just actuaries, accountants and economists,' " says Leech. "The target is somebody who is educated and smart, but maybe confused/afraid and doesn't fully understand this full pension debate."
The public needs to be informed and, in turn, motivated to force the hands of those in public office to deal with the problem. Leech says many politicians consider retirement-system reform too hot to touch. That's why they called the book The Third Rail. It's a reference to the high-voltage line of a subway.
"A politician touches it and they're dead," Leech says.
In particular, politicians are unwilling to deal with the looming problems facing retirees' most potent savings vehicle: defined-benefit pensions.
This type of pension pools employee and employer contributions, providing top-notch, low-cost management while guaranteeing an income for life for pensioners.
Once commonplace, these pensions are quickly going extinct in the private sector. Even public-sector plans face problems that threaten their future because a demographic time bomb waits.
Boomers are retiring en masse, creating a losing situation where plans pay out more benefits than contributions they take in from a decreasing number of working members.
"People are living a lot longer than we ever thought," he says.
It also used to be easier for the pension plans' investment portfolios to earn a buck. In the 1970s and '80s, funds invested mostly in government bonds with yields that kept ahead of inflation, even growing funds' assets over time.
But one market calamity after another forced interest rates downward for 30 years, and pension-plan investment boards have had to look to the stock market and other riskier assets to get the returns needed to keep pace with increasing benefits paid out to a growing pensioner base.
This strategy works most years, but every stock market crash pushes funds further into financial trouble. Even the strongest of defined-benefit plans now face an increasingly uncertain future after suffering double-digit losses following the 2008 crash.
Leech says pension plans can shore up their fortunes, and his book focuses on three case studies that illustrate the consequences of a failed defined-benefit system and how this situation can be avoided. One is Rhode Island's pension system. One of its municipal government pension plans did go bankrupt in recent years, resulting in substantially reduced benefits for pensioners and considerable cutbacks in public service.
The Third Rail also examines New Brunswick's pension system. Many of its government plans were in deficit, including the City of Saint John, which in 2011 had a deficit of $130 million, almost as large as its annual revenue of $138 million.
Even the Netherlands -- a pioneer in pension plans -- faced tough decisions to keep its storied system strong. The Dutch system had gone from a healthy funding ratio of assets to liabilities of 150 per cent in 1999 to 110 per cent in 2002 following the dot-com crash, but before the situation worsened, stakeholders took action to fix the system.
And that's largely the crux of The Third Rail -- the pension system can be repaired.
Yet fixing it involves tough choices such as increasing contributions and making some benefits such as cost-of-living increases contingent on pension-plan investment performance.
While painful, Leech says the measures are much less so than the alternatives, such as substantially cutting benefits to existing pensioners.
The fact is, most Canadians could use a defined-benefit plan. Leech says it's the best savings vehicle for retirement, hands down.
But most Canadian workers don't even have a pension plan, whether that's a defined-benefit plan or its lesser cousins such as the defined-contribution plan.
"About 60 per cent of them don't have workplace pension plans," he says.
This is an even more worrisome problem because Canadians in general aren't saving enough for retirement on their own.
"Our savings rate has dropped dramatically," Leech says. "Three or four decades ago, we were saving at the rate of 20 per cent of disposable income, and today it's more like 5.5 per cent."
According to a recent C.D. Howe report, we need to save about 17 to 20 per cent of our income for about 25 years to replace 70 per cent of our working income, he adds.
CPP and OAS can only make up a small fraction of most Canadians' retirement income, and Leech says not enough people contribute to RRSPs. It's a situation with profoundly bad implications for public coffers.
As seven million boomers retire in the next two decades, they will be increasingly reliant on OAS and GIS, programs that are funded by government revenues -- a.k.a. our taxes. Already, these programs are Canada's biggest fiscal expense, but they are expected to triple to $108 billion by 2030.
It's a financial super-storm heading our way, but Leech says we can do something about it. For one, the many Canadians without a workplace pension plan need better savings vehicles. One solution is expanding CPP by increasing contributions from $2,300 annually to $2,930 for workers with $50,000 annual incomes. This would raise their retirement benefit from about $12,150 to about $17,500 annually. With OAS, retirees would have a base income of about $24,000 a year, almost half their working income.
But Canadian workers who aren't part of work pension plans also need another savings vehicle, something akin to a group pension plan, Leech says.
"Membership and contributions would be mandatory, because we've proven that voluntary, tax-assisted savings plans don't work. RRSPs are a dismal failure."
This savings plan would pool member assets similar to CPP, providing access to high-quality, low-cost money management. Once retired, pensioners would have to purchase an annuity with their assets, providing a guaranteed income for life -- an important component.
"On average, you might live to 85, but there still is a chance you might live to 105," Leech says. "By entering into an annuity contract, you hedge some of that bet."
While the problem is ominous, the system can be fixed, providing we collectively make difficult choices today, Leech says.
Reform will involve a little bit of pain today, but it will lead to substantial gain down the road.
"You make small moves today and they have huge payoffs over a long period of time," Leech says. "You do that or you wait until you're facing 50 per cent cuts to benefits and you are forced to take action, and that's truly painful."