Thank you very much.
I was asked by Mr. Ted Menzies, the parliamentary secretary to the treasury, to look at the Canadian pension system. It was a pleasure to come across a pension system that I would describe as high performing. There were a lot of very good things to say about the Canadian pension system. Normally when I work on a country in detail for the first time I find there are a lot of bad things that happen.
I will start by going through three things where the Canadian pension system works very well, some of which have been alluded to by other speakers.
I think the first area is that of adequacy. In an international comparison against the OECD 30 countries, Canada has the fourth lowest poverty rate among older people, with around a 4% poverty rate according to our standard definition of poverty, compared with an average of more than 13% in the 30 OECD countries.
We also see, if we look at old age incomes of all pensioners, that the average incomes of older people in Canada are high relative to the population as a whole. Their incomes are about 91% of the average, once we adjust for differences in household size. This compares very favourably with the OECD average of 82%.
Looking forward, as other speakers have mentioned, the basic pension, the old age security, and the means tested scheme, the guaranteed income supplement, look like they will provide a very effective safety net in the future.
I think one thing that hasn't been mentioned is that the drop-out provisions of the CPP/QPP also provide a very effective safety net for people with less than full careers.
So Canada's pension system is looking good on the measures of adequacy. It is also looking good on measures of financial sustainability. Current pension spending in Canada is about 4.5% of GDP. That compares to something like 8% on average in OECD countries and about 9% in the European Union.
If we look forward—and I have spent a lot of time with the Office of the Chief Actuary in Canada looking at the projections—Canada's pension spending is of course going to increase as the population ages, from around 4.5% of GDP now to 6.2% by 2060. But the increases in other countries are much more rapid. The EU will go from around 9% up to 13% of GDP. So Canada does not face the same financial sustainability problems as many other OECD member countries do, particularly in Europe and among the east Asian countries, Japan and Korea, whose populations are aging most rapidly.
I think the final positive point about the Canadian pension system is the concept of a diversified pension system. All kinds of pension schemes are subject to different kinds of risk and uncertainties. Individuals face different risks and uncertainties in their lives: losing their jobs, being persistently low paid, and divorced, and so on. The balance in the Canadian pension system, with its diversification between public and private provision of pensions, between the funded provision, putting money aside now to pay a pension for later, and the pay as you go provision, paying benefits after current contributions, we believe is the best way to protect against the different kinds of risks and uncertainties.
The foregoing is really a review of what we think are the positive points of the Canadian system.
I will move on to the diagnosis part now. I have three points to make about the challenges the system faces.
One question that has been asked is about the coverage of the pension system. As I mentioned, the public pension system, both through old age security and GIS, plus through the drop-out provisions of the CPP/QPP, has very good comprehensive coverage.
The private pension side is where there is the greatest problem. But Canada is not alone in having this problem. If we compare the coverage of private pensions by age, for example, the pattern in Canada, the U.K., Ireland, and the U.S. looks very similar, in that there is much lower coverage for younger workers and older workers, and, similarly, by earnings, there is much smaller coverage of low earners than high earners.
Now, in Canada and other countries with very redistributed pension systems, we can rely on the public scheme to pick up the retirement income requirements of the lowest of earners. But there is a problem with the low- to middle-earner groups, where coverage of private pensions is small, but they are not really being picked up effectively by the public scheme.
We have looked at the question that Keith Ambachtsheer was raising about how much do you need to contribute to get a pension. We took a target retirement income of just the average for the OECD countries. Actually, the numbers turned out to be fairly low. It's something like, if you contribute every year from age 20 to 65, you only need to contribute about 4% or 5% of your income into a private pension in Canada to reach the OECD average. The problem is that most people have missing years. Often at the beginning of their career they delay joining a private pension while they have other expenses, and often at the end of their career they want to retire early, and of course with those missing years the contribution rate increased very rapidly to something more in the range of about 8% or 9%.
The evidence suggests that many contributors, particularly those to RRSPs, have contributions at a relatively low level.
The second diagnosis issue is the labour market. The labour market exit age for Canada--I was quite surprised by these figures--is a little bit below the OECD average. Men are leaving the labour market on average around 63 and women around 62. That's about the same as in the U.K., but it's less than in Australia, Ireland, the U.S., Japan, Sweden, among the example countries that were studied in detail.
I would also echo the point he mentioned earlier on the average of charges. There is a concern these are rather high in Canada. If you crunch through, a 1% annual charge on the assets means that something like more than 20% of your contributions are going to charges. If it's 2%, this means that something like nearly 40% of your contributions are being paid in charges on the pension.
When we look at international comparisons, we find, for example, the industry funds in Australia, their management charge is somewhere between 0.5% and 1% of assets, although the retail funds in Australia are similar to Canada's. In the United Kingdom, again, when there were personal pensions in the U.K., charges of 2% were pretty common, but the U.K. government has moved, first, to establishing stakeholder pensions, to put a ceiling of 1% on charges, and then with the new scheme, the National Employment Savings Trust, or NEST, they're aiming for charges of 0.3% to 0.5% of earnings.
What are the ways forward as we see them? Different options are being mentioned by different speakers so far. One would be something like a CPP/QPP plus a proportionate increase in the contribution rate and the benefit of the CPP/QPP plan.
A second route would be to make some form of private pension compulsory, be it an RRSP or perhaps some new kind of defined contribution provider, as has been established in the U.K., to try to ensure that charges are rather lower than the existing RRSP system.
One alternative route would be to leave private pension coverage voluntary but adjust the incentive, perhaps by moving towards matching contributions rather than tax deductibility to make these schemes more attractive to lower-income workers who face lower marginal tax rates.
Finally, I would like to mention what one could call the third way, which is the route being adopted by New Zealand and the United Kingdom, which is the system of automatic enrollment whereby workers are automatically enrolled into a private pension. They have to opt out of the scheme if they do not want to be covered.
With those ways forward, I'll draw my opening statement to a close and look forward to your questions.