Retirement Income Coalition

2005 Pre-Budget Submission STRENGTHENING THE VOLUNTARY PILLAR OF CANADA'S RETIREMENT INCOME SYSTEM SEPTEMBER 2004

TABLE OF CONTENTS Page Introduction 1 Unfinished Business 2 Middle Income Canadians Affected 2 Comparison in Growth of Canada's Retirement Benefits 3 Annual Pension by Years of Service 3 Annual Pension As A Percentage of Earnings 4 International Competitiveness 4 Recommendations for Completing Pension Reform 6 2005 Pre-Budget Submission September 2004

1 INTRODUCTION The Retirement Income Coalition (RIC) is a diverse coalition of national organizations, all of which have a keen interest in the health and reform of the Canadian retirement income system. The RIC was formed in 1997 with a mandate to work co-operatively with the government, to ensure a responsible and comprehensive approach is taken to any reform of Canada's retirement income system. RIC members reflect the views of plan sponsors, professional associations, business groups and seniors. These groups are working together to ensure that there is an open, consultative process to any changes to the retirement income system and that any changes are made in consideration of the objectives and context of the total retirement income system. The 1982 Green Paper, Better Pensions for Canadians (released by The Honourable Marc Lalonde and The Honourable Monique Begin) sets out three governing principles for Canada's retirement system: 1)"To guarantee a basic income for those without resources of their own." 2)"To assure fair opportunities for Canadians to provide for their retirement years." 3)"To enable Canadians to avoid a serious disruption in their standards of living upon retirement." The Green Paper's proposals were referred to the Parliamentary Task Force on Pension Reform, which conducted hearings and submitted its report to the House of Commons in December 1983. In February 1984, the government introduced its Action Plan for Pension Reform through its documents titled "Building Better Pensions for Canadians" and "Improved Tax Assistance for Retirement Saving". Both of these documents restated these three principles and used them as a basis for the action plan. These principles are as important now as they were then and are central to our recommendations for additional reform of Canada's private retirement savings and income policy. In the 1984 budget, Mr. Lalonde noted that the tax treatment of RRSPs "penalizes in particular employees of small business, farmers, fishermen, professionals and others who are selfemployed." He announced an increase in the contribution limit, from $5,500 to $10,000 for 1985, rising to $14,000 for 1987. It's remarkable that the limit set by Mr. Lalonde as fair for 1987 was $500 higher than the actual limit of $13,500 in 2002. That's because the projected increases were never implemented. Instead governments stopped treating RRSPs as a legitimate pillar of retirement savings. They were viewed as tax measures primarily benefiting the rich, and as such they were repeatedly cut back in the cause of fiscal restraint. September 2004 2005 Pre-Budget Submission

2 Retirement Income Coalition UNFINISHED BUSINESS The increase from 20 to 30 per cent in the maximum foreign content allowed in RRSPs announced in Budget Plan 2000 gives Canadians the potential to improve their RRSP investment returns, better diversify and raise the value of their retirement savings portfolios. However, since that time the issue of greater diversification through increased foreign content has been virtually forgotten. The RIC views the elimination of foreign content limits altogether as being the next logical step to promote diversification, reduce risk, and to elevate the values of retirement savings investment portfolios. The RIC also welcomes the modest increases to RRSP contribution limits announced in the Budget Plan 2003 as a step in the right direction, despite being disappointed with the limited action taken by the government on the issue. Finance Minister John Manley's 2003 budget provided only a modest increase in RRSP contribution limits. The budget proposes a series of incremental increases ending with $18,000 in 2006, and indexing to the average growth in wages starting in 2007. The level for 2003 was raised from $13,500 to $14,500, to $15,500 in 2004, to $16,500 in 2005, to $18,000 in 2006, and indexed to inflation thereafter. The announced increases for RRSP contribution ceilings were a good start, but fell far short of being sufficient, fair and equitable. More must be done to help Canadians to increase their private retirement savings. Depending on one's savings pattern, a pension of 70 per cent of earnings for a full career is a commonly accepted measure of pension adequacy. This is the amount a family needs to maintain its preretirement standard of living. The 70 per cent target recognizes that expenses such as childcare, mortgage payments, contributions to the Canada/Quebec pension plans, occupational pension plans and/or RRSPs do not continue after retirement. Pension plans covering employees of the federal government and provincial governments have long recognized this principle by delivering, in conjunction with the Canada or Quebec Pension Plans, pensions equal to, or exceeding, 70 per cent of earnings to those retiring after 35 years of service. MIDDLE INCOME CANADIANS AFFECTED Many Canadians' retirement savings suffered a significant setback due to the substantial decline in the Canadian stock market. In August 2004, the S&P/TSX Composite Index was still 26% below its peak of August 2000. As a result, a multitude of middle-income taxpayers are now unable to reach the 70 per cent target. The misconception that it is the "rich" who are affected by the current maximum RRSP contribution limit persists. However, research by RIC has produced a sample list of professional and administrative positions that very clearly shows one does not have to be "rich" to be affected by the limit: TYPICAL SALARIED POSITIONS AFFECTED BY LIMIT Associate Territory Manager Plumber Area Sales Manager Chief Librarian School Administrator ConstableDetective Registered Nurse 2005 Pre-Budget Submission September 2004

3 Low income Canadians can hit the 70 per cent target by saving relatively modest amounts to supplement the pensions they receive from government programs. Unfortunately there are several hundred thousand Canadians who are constrained by the tax limits despite the recent improvements. When they retire, they will receive relatively little from public pension plans and they are prevented, by the tax limits, from contributing enough to their RRSPs to maintain their standard of living when they retire. Through their taxes, they pay towards programs like the Guaranteed Income Supplement and Old Age Security so that others can afford to retire in a manner that maintains their standard of living, yet they themselves are denied this opportunity. COMPARISON IN GROWTH OF CANADA'S RETIREMENT BENEFITS Maximum MP Pension (1) Maximum CPP Retirement Pension GIS/OAS Pension for Low Income Single Seniors Old Age Security Benefit RRSP Limit Contribution Limit to DC Pension Plans Defined Benefit Pension Limit (for a 35 year career) 1976 2004 Percentage Increase $18,000 $1,900 $2,700 $1,600 $5,500 $7,000 $60,000 $102,000 $9,770 $12,255 $5,600 $15,500 $16,500 $64,155 467% 414% 354% 250% 181% 136% 7% In 1976, defined benefit pension plans could provide a 70 per cent pension on earnings up to $85,750 - roughly equivalent to an RRSP contribution of $15,500. The maximum annual accrual of $1715 per year limited mainly high income Canadians. Since then, the accrual rate has only increased by 7%, with a further modest increase coming in 2005. Since then the accrual rate has remain virtually unchanged. The cost of living and the average wage have increased by more than 250 per cent as have the benefits paid from the CPP/QPP, Old Age Security and the Guaranteed Income Supplement. Retirement benefits are, in real terms, significantly less than they were in the 1970s. As a result, the defined pension limits today affect a wide range of middle income Canadians, as illustrated above. As an example, at General Motors of Canada Ltd., pensions for long service middle managers or professional staff are impacted by the existing defined benefit limits. The maximum pension payable from a registered pension plan was frozen for 25 years. Recent increases do little to correct the damage done by three decades of neglect. Had levels been indexed since 1976, defined benefit pension plans would now cover earnings up to $300,000 and would deliver pensions that are equivalent to RRSP contributions of about $54,000 per annum. The following two tables show that in 2004 upper middle income Canadians cannot earn a pension of 70 per cent of their final earnings regardless of their years of service. The conclusion remains, even after taking into account the increases in the limits that were announced in the Budget Plan 2003 for 2004 and 2005. September 2004 2005 Pre-Budget Submission

4 Retirement Income Coalition ANNUAL PENSION BY YEARS OF SERVICE Canadians' Years of Service (Applicable in 2004) Pre-Retirement Income: 10 15 20 25 30 35 Final Year $50,000 $10,000 $15,000 $20,000 $ 25,000 $ 30,000 $ 35,000 $70,000 $14,000 $21,000 $28,000 $ 35,000 $ 42,000 $ 49,000 $90,000 $18,000 $27,000 $36,000 $ 45,000 $ 54,000 $ 63,000 $110,000 $18,333 $27,500 $36,667 $ 45,833 $ 55,000 $ 64,167 $130,000 $18,333 $27,500 $36,667 $ 45,833 $ 55,000 $ 64,167 Regular MP Pension $141,000 $42,300 $63,450 $84,600 $105,750 $105,750 $105,750 ANNUAL PENSION AS A PERCENTAGE OF EARNINGS Canadians' Years of Service (Applicable in 2004) Pre-Retirement 10 15 20 25 30 35 Income: Final Year $50,000 20% 30% 40% 50% 60% 70% $70,000 20% 30% 40% 50% 60% 70% $90,000 20% 30% 40% 50% 60% 70% $110,000 17% 25% 33% 42% 50% 58% $130,000 14% 21% 28% 35% 42% 49% Regular MPs Earning $141,000 30% 45% 60% 75% 75% 75% INTERNATIONAL COMPETITIVENESS Even if annual increases in contribution limits projected by the government in 1984 had been implemented, today's limits would be below those found in both the U.S. and U.K. where the retirement systems and living standards are similar to Canada's. US (2003) UK (2003) Canada (2004) Maximum Non-Income-Tested Pension from Social Security Maximum earnings fully tax-shelterable in generous defined benefit pension plan Maximum contribution to taxsheltered savings plan:- limit for individual taxpayer- reduced for member of pension plan Top marginal rate and the income level at which it is first encountered C$29,200 C$280,000 C$56,000 unreduced 38.6% C$437,000 * No limit if joined plan before 1989. # Lower amount applies for age 35 and under; higher limit applies for age 60 and over. Note: Exchange rates used in calculations: C$1.40 = U.S.$1; C$2.22 = 1 UK Pound sterling C$8,940 C$219,800* C$38,460-87,910 # reduced 40% C$77,510 C$9,770 (CPP) C$91,667 C$15,500 reduced 46.4% (Ontario) C$113,804 2005 Pre-Budget Submission September 2004

5 In the United States, tax-qualified retirement savings plans cover earnings up to C$280,000, while in the U.K. they cover earnings up to C$219,800. Both limits are indexed. In the United States, employers can contribute up to C$56,000 per annum to tax sheltered retirement accounts for their employees. In the U.K., the corresponding limit on contributions to tax assisted retirement savings is between C$38,460 and C$87,910 depending on an employee's age. Moreover, the UK is proposing to eliminate current limits and instead applying additional annual post-retirement taxation if the present value of a pension exceeds 1.4 million pounds (i.e. C$3.1 million). That is well in excess of 3 times the defined benefit limit in Canada in the year 2005 for a person whose career spans 30 years of service. Inadequate retirement savings limits contribute to Canada's uncompetitive personal income tax regime. Upper and middle income Canadians who move to the U.S. or U.K. are able to save much larger amounts for retirement. Increasingly, internationally mobile employees are taking these factors into account in deciding where to work. Many argue that the government's cost of increasing the retirement savings limit is high, but is it? Those who are constrained by the current $15,500 RRSP contribution limit are taxed at a 30 per cent marginal rate (ignoring provincial taxes). After they retire, their RRSP withdrawals will be taxed at rates between 26 per cent and 40 per cent (once again, ignoring provincial taxes, but taking Old Age Security claw-backs into account). This means that whatever taxes the federal government might forego today by allowing these Canadians to contribute more to their RRSPs will be fully recovered, with interest, when the extra contributions are withdrawn. Not only will the government's "investment" be recovered with interest, but it will be recovered at an opportune time, when the baby boom generation retires and the pension and health related demands on the public purse are at their highest. The federal government has worked hard preparing the country for an aging population. The Canada Pension Plan has been reformed. Deficits have been eliminated. The debt has declined as a percentage of GDP. But there is another risk associated with an aging population. When 40 per cent of Canada's taxpayers are retired, who is going to pay the taxes? If we expect the tax system to generate a healthy revenue stream in 30 years, then some of tomorrow's senior citizens better have good taxable incomes or the tax burden will fall heavily on a smaller working population. As many baby boomers are in their peak earnings period, now is the time to encourage them to maximize their own retirement savings. AGE LIMIT SHOULD BE RAISED The federal Budget 1996 lowered the age at which RRSPs must be annuitized or converted to Registered Retirement Income Funds (RRIFs) from 71 to 69. This measure runs contrary to what demographic trends indicate; life expectancies, at age 70 in 1996, were almost two years longer than in 1976. At a minimum, the age limit should be restored to 71; however, given that life expectancies are rising, 73 would be a more appropriate age limit. September 2004 2005 Pre-Budget Submission

6 Retirement Income Coalition RECOMMENDATIONS FOR COMPLETING PENSION REFORM The Retirement Income Coalition recommends that the next budget commit to: 1. Raising RRSP and pension contribution limits in real terms to $20,500 immediately, rising quickly thereafter until it reaches $27,000 2003 dollars at which time it should be indexed to the annual inflation rate. This will enable all income earners in the 3rd tax bracket to have full and immediate access to their 18% RRSP contribution threshold. 2. Increasing the defined benefit pension limit by 64 percent (from 1,833 to 3,000), starting immediately. 3. The age at which RRSPs must be annuitized or converted to a Registered Retirement Income Fund (RRIF) should be raised from 69 to 71. RETIREMENT INCOME COALITION MEMBERSHIP Association of Canadian Pension Management (ACPM) Canadian Pension & Benefits Institute CARP, Canada's Association for the Fifty-Plus Retirement Savings Alliance Retired Teachers of Ontario Ontario Teachers Pension Plan The Canadian Real Estate Association General Motors of Canada Ltd. Investment Dealers Association of Canada Canadian Teachers Federation The Toronto Board of Trade Investment Funds Institute of Canada Ontario Municipal Employees Retirement System (OMERS) Canadian Dental Association SuccessCare Solutions Inc. Pielsticker & Associates 2005 Pre-Budget Submission September 2004