At a time when the Canadian Federation of Independent Business (CFIB) is advocating an end to “defined benefit” (DB) pensions, the latest retirement index suggests that the alternate “defined contribution” (DC) pensions are struggling and will not produce the kind of income seniors need in their retirement years. DC plans on average presently replace 22.3 per cent of pre-retirement income. How many of us could successfully live our retirement years off less than a quarter of what we presently earn?
By contrast, a typical DB plan will replace between 50 and 70 per cent of pre-retirement income. Seventy per cent is considered by financial planners to be the target for Canadians wishing to maintain their existing lifestyle. That’s a big gap between 22.3 per cent and 70 per cent.
The CFIB believes making it more difficult for public sector workers to retire is the solution rather than improving retirement income for the two-thirds of private sector workers without a workplace plan. This is idiotic.
Unions have advocated for improvements in the DB Canada Pension Plan to better assist all workers, although the CFIB also opposes this. The CFIB would also have us do away with early retirement.
Given what we know about the social determinants of health, we have to wonder how willing independent businesses in Canada are to carry higher public health care costs should even more seniors find themselves struggling? We also wonder how much shopping a growing number of seniors in poverty will be doing at these independent businesses?
In the magazine Benefits Canada, Michelle Loder of Towers Watson states “Unlike with DB plans, DC sponsors don’t make extra contributions to make up for poor performance in past years, which can result in significant deficits relative to the plan members’ expectations.” The CFIB’s own calculations show that with the same contributions over time that the DB plan will be worth dramatically more than the DC plan. If that is the case, why would the CFIB want both public employers and employees to switch to a plan that gives them a much worse return on investment? This makes no sense, unless of course your real plan is to simply reduce employer pension contributions to public sector workers.
DB plans are based on a pre-agreed upon pension payout that may require some fluctuation in contribution rates from both employers and employees to keep the plan adequately funded. Defined contribution plans are really just large pooled RRSPs with a fixed contribution rate. The pension amounts are determined by market performance. In a DC plan there are no guarantees that retirement income will be sustainable and therefore there is less pressure on the managers of these funds to generate returns.
The CFIB would certainly like us to lower our expectations in retirement. Instead of setting a retirment goal of 70 per cent of pre-retirement income, the CFIB says 50 per cent should be enough. We won’t even get that far under their solution of moving everyone to DC plans.
This lowering of expectations comes after 30 years of Neo-Liberal policies that have left middle-class incomes stagnant while the top one per cent sees itself as entitled to more. Earlier this year A Conference Board of Canada study ranked Canada a mediocre 12th of 17 peer nations when it comes to income inequality. Adjusted for inflation, the 2006 census noted that median annual wage increases for Canadians amounted to just $53 over a quarter century.
Isn’t it time we talked about raising expectations for the majority of us instead of deflating them? Workers played by the rules. They elected pro-business governments. Now they are told to simply expect less.