How to Save for Retirement in Ontario, Canada?

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1 1 Canadian Labour Congress Background for Individual Responses Questions from the Ministry of Finance Ontario Consulting with Ontarians on Canada s Retirement Income System How much income do you think you will need in retirement to maintain your standard of living? What portion is this of your current income? : Experts generally agree that families need about 70% of their pre-retirement income in retirement to maintain their previous standard of living. That is because retirees do not have to pay for work related costs and they no longer need to put aside savings for retirement. Low income families need more than 70% of their earnings to meet basic needs and to live above the poverty line after a lifetime of work. Do you belong to an employment pension plan? If so, is it a defined benefit or defined contribution plan? Only 37.5% of Ontario workers belong to an employer pension plan. Only about one half of all private sector pension plans provide a defined benefit one that provides a pre-determined level of pension income, usually based on previous earnings. Defined contribution plans provide a pension income based solely on investment returns, which can vary according to the markets with three stock market meltdowns in the last fifteen years, we can see why defined contribution plans provide less stability for people about to retire. Do you expect your future OAS and CPP benefits, together with your employment pension plan and/or private savings, will provide you wish sufficient income in retirement? CPP as structured today provides only up to a maximum of 25% replacement of pre-retirement wages based on maximum pensionable earnings of $47,200 (2010 level). The average CPP benefit paid to a Canadian pensioner today is just % per month. The maximum CPP benefit is $ per month. The remaining portions of the public pension pillar of our retirement system are Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) that are paid for out of the government s general revenue. Together, they replace up to 15% of the previous earnings for the average worker, with GIS geared to seniors with the lowest incomes. The maximum amount of Old Age Security plus the Guaranteed Income Supplement for a senior with no other source of income is $15,672 per year.

2 2 The proportion of pre-retirement income replaced by the public pillar of our retirement system is much less than in most other advanced industrial countries, and leaves workers without an employer pension plan heavily dependent upon personal savings like high fee mutual funds and other insecure RRSP investment instruments. Are you concerned about your ability to save? Governments have to put in place an adequate system of public pensions so that Canadian has security in their retirement after a lifetime of work. If we had a better CPP that replaces 50% of the maximum pensionable earnings instead of the current 25%, it would be easier to save enough for retirement. Do you make RRSP contributions? Do you utilize the RRSP room available to you? Not many people contribute to RRSPs and hardly anyone makes the maximum allowed contributions. Most who make the maximum contributions are high income earners. The majority of the dollars contributed to RRSPs are from people who earn more than $80,000 per year those who can most afford it. Management fees by the private sector on investment vehicles in Canada are among the highest in the world an analysis of management costs for mutual funds in 20 countries Mutual Fund Fees Around the Word shows Canada ranks dead last. Studies indicate the average Management Expense Ratio (MER) for mutual funds in Canada are 2.8%. What factors may prevent you from taking full advantage of your RRSP room? The key factors behind low contribution rates to RRSPs are stagnant real wages, which have been flat or falling for most working people for the last twenty years. Canadians carry a high level of personal debt, which is now the highest share of income in history. Another factor is that many people have earned very low (if any) returns on RRSP savings over recent years due to excessively high management fees charged by the financial industry on investment products, and the impact of three stock market crashes in fifteen years on the markets and on interest rates. What can be done to help reduce fees charged on investment funds?

3 3 Management fees by the private sector on investment vehicles in Canada are the highest in the world and the impact on returns is huge. Roughly speaking, each percentage point of management fees results in a 20% loss in value over forty years of an investment. A two percent management fee over forty years means 40% of the value of your investment is going into the pockets of the financial industry. Management fees for retail equity mutual funds of the kind which are commonly held in RRSPs average 2.5% to 3% or even higher, compared to the management expenses of one half of one percent for the Canada Pension Plan. Employer pension plans typically have significantly lower costs than RRSPs but only very large plans run in the interests of plan members come close to matching the low management costs of the CPP. A better way to help Ontarians save more for retirement is to expand the Canada Pension Plan and double future benefits. The government should also regulate fees charged by the industry. Do you favour a modest expansion of the CPP? If so, do you prefer an increase to the replacement rate, an increase of the earnings ceiling, or both? The best way to secure the retirement future for all Canadians is to increase future CPP benefits to replace 50% of the maximum pensionable earnings (currently $47,200). Doubling future benefits does not mean doubling premiums. You can achieve a 100% increase in future benefits with only a 60% increase in contributions. The CPP is a secure and sound pension plan there is enough to pay for its defined benefits for at least 75 years -- the farthest forecasting out that actuaries will do. The CPP is a low cost pension plan that provides workers with a defined benefit that is indexed to inflation, and it is fully portable, from job to job, from province to province. The CPP has very low overhead costs. Under current rules, any CPP expansion must be done on a go-forward basis, and must be fully funded (ie. financed through a premium increase, which provides enough revenues to cover the increased costs). What do you believe is a reasonable increase in CPP contributions to secure enhanced benefits? Doubling future CPP benefits from 25% to 50% of pensionable earnings as proposed by the Canadian Labour Congress would require a modest annual premium increase each year for seven years, totaling an additional 6% at the end of the phase-in-period, divided equally between workers and employers.

4 4 Annual increase for a seven year phase-in period under the CLC plan, range from 2 cents an hour to 9 cents an hour depending on income: You earn $47, the annual increase works out to 9 cents an hour You earn $41, the annual increase works out to 8 cents an hour You earn $30, the annual increase works out to 6 cents an hour You earn $20, the annual increase works out to 4 cents an hour You earn $10, the annual increase works out to 2 cents an hour A worker would earn a double pension benefit for each year that they contributed in the new expanded system. The longer they contribute in the expanded system, the more income they will ultimately receive on retirement. Paying 3% more of pensionable earnings is a very modest amount for workers to pay for a much larger CPP benefit which is secure and indexed to inflation. Do you believe a single fund for an expanded CPP is appropriate? Should there be more than one fund? If so, should they be managed by the public or private sectors or both? The CPP Investment Fund is a very large, diversified investment fund that operates at arm s length from the government at very low costs. Its management expenses on average are less than 0.5% - far less than the average management expense ratios of private sector investment vehicles. It is hard to see how this could be improved upon. Do you think you would accumulate less private savings for retirement if the CPP was expanded? If so, would you prefer to save through higher CPP contributions or your own investment choices? Expanding the CPP would likely result in lower contributions to RRSPs by middle income earners, but they have already resisted contributing to RRSPs in recent years due to the turmoil in the stock markets. Low and middle income earners simply don t want to take risks with their hard earned savings any more. Moving retirement savings from high cost RRSP accounts which deliver low returns to a secure, well-managed, low cost public pension plan would benefit the great majority of Canadians. Many higher income Canadians would continue to buy retail investment products, so the impacts on the financial sector would be limited. INNOVATION Suggested points on the numerous questions about pension plan innovation and a role for private sector industry led innovation: The banks, financial and insurance industries should not be relied upon as pension innovators it s a conflict of interest to let industry entities whose primary focus is to make a profit for

5 5 themselves, as pension plan sponsors, which is why it is not allows under Ontario s Pension Benefit Act. We ve seen the promises of the financial services companies for decades that they alone can deliver efficient and valuable pension alternatives. The facts speak for themselves = the average Management Expense Ratio for mutual funds in Canada sits at 2.87% of assets which means the industry pockets, over a 40 year investment period, over half of their investors hard earned savings. Given this poor record of performance, government should not be encouraging or compelling workers to be members of finance-industry created retirement schemes. A far better proposal is expanding the benefits under the Canada Pension Plan that would offer more help to Ontario s workers today to help them save for their retirement.