The Mintz Report and the Pensions Debate

I blogged back in August to express some concern about the implications of Jack Mintz’s appointment as research director for the federal and provincial finance minister’s review of the Canadian pension system. .   Suffice to say now that the general thrust of  his report, tabled this week, , did not come as a great surprise to me.  (The research studies that support the summary report by Mintz will be posted to the Department of Finance web site as well.)

It is disappointing that the meeting of finance ministers in Whitehorse seems to have reached no agreement that the private part of our pension system is fundamentally flawed. This is perhaps due  to Mintz’s overall conclusion that “(o)verall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement. ” This conclusion is partly based on revising downwards traditional judgements of how high a percentage of after tax income must be maintained in retirement to maintain consumption standards, and on some fairly optimistic assumptions on savings rates and rates of  return on investment. In fairness, Mintz does go on to say  as part of his overall conclusion that “(t)he evidence does strongly suggest that some Canadians do not have sufficient replacement income.”

A  key problem with Mintz’s framing of the issue is that he does not really focus on the retirement prospects of today’s younger workers,  and focuses his attention mainly on the well-being of the current elderly and on overall savings rates based on a (as he concedes, inadequate) snapshot of recent data on savings.  Yet today’s retirees worked in a very different context, one where employer sponsored pension plans covered significantly more workers, and  where investment returns were generally quite high. Critics of the current pension system generally agree with Mintz that public pensions have worked quite well in terms of providing a bare bones, basic income for lower-paid workers,  and that  Canada compares quite well to other countries in terms of income replacement rates of today’s elderly. The key problem is that future retirees are unlikely to fare anywhere near as well.  It seems far from likely that RRSP savings will rise by enough, on a sustained basis, to replace income from an employer pension system in decline, or can achieve similar rates of return to those of large employer plans.

The theme of a significantly weakening third pillar under changing economic and demographic circumstances is developed more fully in Bob Baldwin’s report for the Ontario government. This is also a pretty cautious document,  dwelling as much on the strengths of the current system as on its failures, but it does advance a case for a discussion of fundamental reforms.

“Economic, labour market and demographic trends may make it harder for third pillar (ie employer pension plans and RRSPs – my addition) pension institutions to deliver adequate retirement incomes in the future … the decline in EPP (employer pension plan) coverage and the shift from DB to DC (defined benefit to defined contribution) are not prompting offsetting forms of wealth accumulation for retirement. This is a very important issue that needs further study……The status quo is an option. However, it is an option that may leave a significant minority of people with moderate to high earnings facing a decline in their standard of living in retirement, and force many people to rely on sub-optimal pension and retirement savings institutions.”

Mintz is not very critical of the private pension industry in Canada, and fails to strongly conclude – unlike the recent pensions reports from Alberta- BC, Nova Scotia and Ontario – that individual savers fare very badly and need much larger, lower cost collective investment vehicles.  He professes himself to be “puzzled” that advisers and fund managers involve clients in high cost active investment strategies, as opposed to lower cost, passive strategies which yield equal rates of return.  This seems a touch naive.  Certainly there is not much in his report on the high returns to the financial sector which flow from managing third pillar pension plans and individual retirement savings.

One of  Mintz’s arguments – valid so far as it goes – is that private retirement savings are only one source of economic well-being in retirement. One part of his report shows that “retirees” without an employer  pension have incomes in the same range as those with pensions, but this is in significant part  because they are much more likely to have employment income. There is no reflection that working might be a rather unpalatable choice for many older workers without a decent pension. The fact that those without pension plans can draw on wealth by selling a house also rather misses the point.

I was looking forward to a post Whitehorse debate between proponents of a bigger, better Canada Pension Plan and advocates of  pooled individual retirement accounts like Keith Ambachtscheer. But Mintz  leaves the status quo of  “you’re on your own” individual retirement accounts very much in play.

By way of contrast, the Globe carried an excellent  full page essay on Saturday on the case for an expanded CPP by  Jon Kesselman,  a very mainstream UBC economist.

The finance ministers did at least promise consultations, and the pension debate will surely continue.

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