Bonjour. Thank you for inviting me to appear before you today.
In order to cover key points in seven minutes, I have borrowed a format from David Letterman: The top ten things the federal government can do to improve the retirement income system available to Canadians are.... This is my view from 30,000 feet.
I'm an academic, so I have to start with number ten: Support research that will provide better linkages between data sources for registered pension plans, group and individual RRSPs, and other assets. That research also needs to examine the adequacy of retirement income for families, and not just for individuals. The work that was done through the Ministry of Finance last fall was an important first step in this direction, but it leaves many questions unanswered and indeed unanswerable.
Number nine: Amend tax treaties, especially the one with the U.S., to provide reciprocal recognition of other nations’ tax-favoured retirement savings vehicles. Right now those Canadians whose citizenship in other countries requires them to file taxes there as well as here effectively have no access to tax-supported retirement savings. A dollar put into an RRSP does reduce current Canadian taxes, but that reduction may well be converted into a tax increase in the other country.
Canadian tax rules currently permit charitable contributions to organizations recognized under U.S. law within limits. Why not recognize contributions to U.S.-qualified plans on the same terms as contributions to Canadian-registered plans? Why shouldn’t the Windsor resident working in Detroit be allowed to have the same tax treatment for participating in a 401(k) plan that a neighbour working in Windsor might receive on a defined contribution RPP? Rollovers back and forth across the border would also be a wonderful idea.
Number eight: Revisit some government-imposed restrictions--not all federal by any stretch of the imagination--regarding the purchase and sale of annuities. It might be possible to have a qualified outsider, such as a life insurance company, manage the assets and liabilities of a pension plan that's winding up on an administrative-services-only basis. Bring in the insurance company's guarantee on only a small portion of the uncertainty, the unpredictability of those claims, to provide the needed guarantee. That would tie up far less of the insurer’s capital, thereby reducing costs and allowing correspondingly higher payouts. Similarly, restrictions that allow only Canadian companies to service this market keep qualified sellers, such as branch offices of sound foreign companies, from competing to sell annuities. This in turn also results in less competition and potentially higher prices.
Number seven: Definitely within the realm of finance, gradually begin to issue a few longer-duration Government of Canada bonds. Securities that extend to at least forty years and possibly fifty will assist those trying to hedge the longevity risk, whether pension funds or annuity sellers, in matching their assets and liabilities. Removing a portion of the associated reinvestment risk will, in the long run, aid in the development of a more competitive and more complete annuity market.
Number six: Equalize the payroll tax assessment on different forms of retirement savings. Currently contributions to RPPs do not attract EI and CPP contributions, but contributions to group RRSPs do. This differential tax treatment skews decisions and may be hindering the growth of group RRSPs--not necessarily by employers but perhaps by employees--as an important retirement savings vehicle. The unanswered question I'm admittedly leaving on the table for you is, if this change were implemented, how contributions to individual RRSPs should then be treated.
Number five: Extend the super-priority provided to pension plans of bankrupt companies to include due but unpaid special payments for solvency deficiencies and unfunded liabilities; that is, for supplemental liabilities and not just the normal costs. There is a good description of the details of such a proposal and the reasons supporting it in the recommendations of the Alberta and B.C. joint expert panel on pension standards. I won't use any of my time to go further into that today.
Number four: Recognize the special challenges faced by immigrant populations. Those who arrive in Canada at mid-life or later have a limited time in which to earn benefits under OAS and CPP or QPP. They also have less time to accumulate individual retirement savings, perhaps even having been forced to leave assets behind in a country that's not safe to stay in any longer. The recent changes to CPP that drop a few more years of low earnings from the calculation will mean incremental improvements for this population, but perhaps there are other adjustments that can be identified to balance the benefits of our system with the degree to which we wish to support our immigrant population.
Number three: Consider creating the infrastructure needed for the private sector to offer efficient investment vehicles that commingle funds from multiple sponsors. This may be a new registered plan vehicle, but more likely it can be achieved with adjustments to the definition of plan sponsor and specification of adequate disclosure requirements.
Number two: If you proceed with changes to CPP—and I'm still a little bit on the fence on that one—focus first on a gradual expansion of the yearly maximum pensionable earnings, the YMPE, from one times average annual earnings to perhaps 125% of annual earnings. Even maintaining the current 25% target replacement ratio, such a change will gradually result in an increase of CPP benefits by 25% of 25%, or about a 6.25 percentage point increase in the replacement ratio. That number would close a majority of the gap between those who do and do not have RPPs, based on Statistics Canada work. It also would be accommodated automatically into existing payroll systems and existing RPP integration rules, minimizing the administrative costs associated with implementation and transition.
Number one: Permit plan sponsors to include provisions such as automatic enrolment, so-called opt-out rather than opt-in rules. Employ “save more tomorrow” options, where people can sign up today and they don't actually see anything taken from their paycheque until a year from now, and allow plans to provide default investment options in their registered pension plans that may be age-based, or otherwise well-thought-out expert advice that's the default option, rather than no advice at all being the default option. These types of changes will do much to overcome the negative impacts of human inertia that are evident in lots and lots of this literature.
In conclusion, the system we have now is functioning pretty well for a reasonably large proportion of Canadians, but there is room for improvement, with most of the needed improvements taking the form of fine tuning. What I've presented to you here today are a series of ways that can address incrementally those pockets where the biggest problems have been identified. In addition, there's also tremendous room for simplification and harmonization of retirement income legislation and regulation. I recognize this is not something that the federal government can do in isolation, but I commend you to please take some leadership in the area.
I thank you for your attention today and I look forward to an engaging and interesting discussion over the next hour and a half.