PENSION PLANS WHAT YOU GET WHAT YOU PAY
HERE IS A CLEAR, QUIET ACCOUNT THE FACTS BEHIND THE NATIONAL UPROAR OVER
WHAT EXACTLY is the argument about contributory old-age pensions?
Two new schemes are about to be introduced—one by the federal government for nine provinces, one by Quebec for its own residents. (Ontario’s new law' is only to regulate private pension plans not to set up a provincial one.) Few details have been announced about the Quebec project, though its outline is known. The federal proposal has been spelled out in detail; it will be laid before the coming session of Parliament and will probably be enacted without substantial change, since no party has yet spoken out against it. Opposition has been vehement, but has come from the financial community, especially
the life-insurance and trust companies that operate private-pension funds for about one quarter of all Canadian workers.
Of their many criticisms of the federal scheme, three at least are undeniable:
1. It offers an unearned bonus to the middle-aged, at the expense of the young and of the next generation. A man who is now' fifty-five, w'ho earns $4.500 a year or more and w ho retires at sixty-five, will then get a lifetime pension of $75 a month. As an annuity this is worth $10.200. All he will have paid for it is $450. Another $450 will have been paid by his employer (or, if he is self-employed, he will have paid the whole $900 himself). The remaining $9,300 is a subsidy provided by working men and
women who are younger than he is.
2. It gives most help to those who least need it. To people already retired it offers nothing more than they are getting now, nor to widows below pension age, nor to disabled people. The less a man earns while he is working the smaller the pension he will get.
3. Cost at the outset is misleadingly low. Contributions of only two percent of earnings will be more than enough for the first ten years, and probably won’t need to be raised until about 1990. After that, though, they w'ill rise steadily until they are at least double the initial amount, and probably more. (Experts disagree on the amount of the increase, but all admit it can’t be less than one hundred percent.)
An unflattering social fact
These sound like rather serious objections. Why were they not accepted? Why have a contributory pension at all, or why relate it to earnings? Why not simply raise the existing flat-rate pension from $75 to $100 or more, pay for it out of current taxes, and let everybody get the same amount?
One answer may be unflattering to our social and economic system, but it is true: if flat-rate pensions were
any higher, too many people would be getting more money after they retire than they ever could earn as workers. Already, with the pension at $75, about two and a half million people in the Canadian labor force earn less than the $150 a month that an old man and his wife receive between them. In the poorer regions of Canada, the outports of Newfoundland or the barren little farms of northern New Brunswick and Quebec, there are many homes where grandpa and grandma bring more money into the household than father does.
In other places, though, such as Metropolitan Toronto, $75 a month will hardly more than pay the rent for an elderly lodger, however mean his quarters; old people without other resources have to get extra help from the city welfare services. But in places where rents are high, average earnings are high too — there is a rough correspondence between local wages and local minimum needs.
Another and stronger reason for a contributory plan, with benefits bearing some relation to contributions, is that it will put a brake on boondoggling. The contributory pension system will be wholly self-supporting; the taxpayer as such will contribute nothing. Once the plan is in full operation, anyone who agitates for higher benefits is also agitating for higher contributions. No more increases will be available free of charge.
This will remove a danger that has grown tremendously since the universal pension was introduced eleven years ago. About two and a half million Canadian workers pay no income tax, and are largely unaware of paying ai.y taxes at all. Almost another million are already drawing their oldage pensions, and naturally would like bigger ones. Thus almost four million electors, nearly half the entire elec-
toral list, can vote for higher pensions without incurring any cost whatever to themselves. The intolerable temptation this imposes on political parties has been demonstrated in the last three federal elections.
For these reasons it was decided that while the flat-rate $75 would be continued, any additional pension would be offered on a contributory basis, varying according to income. For the nearly six million Canadians who work for wages and salaries, the new pension plans will be compulsory; they will pay half the cost, their employers the other half. For the million Canadians who arc self-employed (and for the farm hands, domestic servants and casual laborers who are exempt from the compulsory plan for administrative reasons) there will be oportunity to participate on a voluntary basis, but they will have to pay the entire cost themselves.
What will the cost be?
This is the big difference between the Quebec plan and the federal one. Ottawa intends to charge two percent of earnings up to a ceiling of $4,500 (a little above the national average). Thus, for each participant, employer and employee would pay up to $45 apiece per year.
Quebec intends to charge double that amount — four percent of earnings — because Quebec’s pension scheme has a dual purpose. One purpose is to provide a retirement income for the aged; the other is to raise a fund for economic development of the province. The fund will be colossal — eight billion dollars after thirty years, or four times as much as the entire provincial debt, direct and indirect, at the present time. Even five years will build it up to almost a billion and a quarter. With these enormous sums in hand, Quebec no doubt will be able to offer somewhat better benefits than the Ottawa plan — if only to soften the painful fact that Quebec pensioners will have to pay twice as much for what they get. Exactly what Quebec’s benefits will be has not been announced, but the federal benefits have been published in detail.
An important new feature
For those who retire at the age of seventy, the new pension will be one fifth of the first $4,500 of income. People who have earned $4,500 a year or more will get $75 a month; those who have earned $3,000 will get $50 a month, and so on up and down. (All these amounts, of course, are added to the $75 a month that everybody gets at age seventy.)
However—and this is an important new feature — people will no longer have to wait until seventy before
drawing their pensions. They can
take a smaller pension at sixty-five.
This change is essential because most salaried workers and many
wage-earners have to retire at sixtyfive whether they want to or not.. Once retired, they are no longer
eligible for the contributory scheme. Only earners can take part, and living on a private pension or private savcontinued on pape 31
continued front page 18
Workers between 55 and 60 may be in for one of the greatest bargains in actuarial history
ings wouldn’t count as earning. The retired person has to drop out. Obviously, when he does, he’s entitled to the pension for which he has been contributing.
For sheer convenience, if nothing else, Ottawa will offer the same option for the flat-rate pension, now available only at age seventy — a little more than two thirds of $75 a month, $51 to he exact at age sixtyfive.
The change will come into effect gradually over a five-year period and before the contributory pension is being paid in full. If, as planned, the contributory plan goes into effect next January, payments will begin one year later — but they will amount to only one tenth of the full pension. A year later they will be two tenths, then three tenths, and so on until the full amount is being paid at the end of ten years.
During this interim period, the retirement age will be lowered a year at a time. One year after the plan comes into effect in 1966, people will be allowed the option to draw pensions at sixty-nine instead of seventy. After two years, they can start at sixty-
eight; after three years, at sixty-seven; and so on until the permissible pension age reaches sixty-five. Even then, people will not be able to claim their contributory pensions unless they actually retire — only at the age of seventy will they draw their pensions
whether retired or not. But for most
people the point is academic, since they have to retire at sixty-five anyway.
A man now fifty-five, earning $4,500 or more, could start at sixty-
five drawing $126 a month — $75 in contributory pension, $51 in flat-rate. If his wife is also sixty-five by then, she too could get $51 for a combined family pension of $177 a month.
However, it would still be to the man’s advantage not to take his pension early, but to keep on working until age seventy. For only $225 more out of his own pocket—$45 a year for the five years—he would get a pension that w'ould be $24 a month higher. If his wife also waited for age seventy, she too would get $24 more each month, for a combined family pension of $225 a month, or $2,700 a year.
Only a fortunate few will be able to do this. Government planners estimate that four out of five men, and nine out of ten women, will take the lower pension as soon as they reach sixty-five. But even at that age. for those in the $4,500 income group, the combined family pension will be almost half their former earnings. At seventy it will be three fifths, by far the highest state-operated pension in the world.
For the lucky workers who are now between fifty-five and sixty, this is the greatest actuarial bargain ever known. Their total contributions in the next ten years will be $450 apiece.
continued on page 34
Every year thereafter for the rest of their lives, they will each get at least twice as much as the whole amount they ever put in.
A thirty-year-old worker is not so favored. He will pay the same $450 during the next ten years, if he's in the same $4.500 plus income group, and another $450 in the ten years after that. Then, in all likelihood, the rates will be increased — by how much, it’s impossible to say, but they will probably double and may even triple in the course of his working life. If they average sixty percent higher between 1980 and the year 2000, he will have paid about $2,000 altogether in contributions by the time he himself retires at sixty-five. And what will he get for his $2,000? Exactly the same pension as his elders got for $450 assuming that the ceiling of $4,500 doesn’t change.
The younger the worker, the wider the gap. Even the youngest will get no less than he is entitled to get actuarially — his lifetime contributions will just about meet the economic cost of his own pension — but this means that his employer’s contributions have all gone to the support of older people. Some such disparity is inevitable when a pension scheme is first introduced, or it would be forty years before anybody got the full amount of the pension. The new Canadian plan is designed to reach maturity in ten years; hence the big advantage for those who have only ten years to go before retirement.
This advantage is much smaller under the Quebec scheme, which is “funded.” Contributions (at four percent of earnings) will vastly exceed pension payments during the first generation in which the plan operates. This excess, running into billions, will he “invested” in provincial bonds. Eventually, interest on the bonds will help to pay the rising cost of pensions, and Quebec will not have to raise its contribution rates as soon as Ottawa.
But for the present generation of Quebec workers, the provincial pension scheme is really a system of forced saving on which the contributors will get no cash return. They will get the benefit of better schools, better roads, a stronger provincial economy, but in actual money they will get little if any more than Ottawa is offering for half the price.
Will the Quebec voter patiently accept this doubled burden?
Premier Jean I.esage and his advisors believe he will. They think the Québécois has enough interest in the development of his province, in seeing it catch up economically with English C anada, that he won’t mind paying more for his pension. (They may also reflect, though they do not say. that many a Quebec voter will never find out that les Anglais in other provinces arc paying only half as much as he is for pensions of about the same amount.)
With the changes announced in January. Ottawa’s plan is a little closer to Quebec's than it was originally. It is not fully funded as Quebec’s is, but the reserve fund is now to he much larger — two and a half billion dollars at the end of ten years. Half of this will he invested in federal government honds, half in provincial. Reduction of some benefits in the Ottawa
plan may make it easier for I.esage to contrive extra, compensating benefits under his own more costly scheme.
Nevertheless, I.esage would he happier if Ottawa’s contribution rate were closer to his own. This is what prompted his so-called “veto threat” at the federal-provincial meeting in November. The veto, if exercised, would block a constitutional amendment that everyone (including Lesage) really wants.
Under the BNA Act now, Ottawa has authority to pay pensions to the aged but to nobody else. Benefits for welfare reasons — to widows below pension age, to orphans, to disabled people — are a provincial matter which Ottawa has no right to include in a federal scheme. Prime Minister Pearson suggested that the constitution be amended to make this inclusion possible. Nine provincial premiers agreed. I.esage objected, with a broad hint that if Ottawa were to raise its contribution rate to four percent, Quebec’s objection would he withdrawn. None of the other ten governments paid any heed to this threat, and I.esage is most unlikely ever to repeat it.
How Robarts made Ottawa nervous
Ontario's reservations were taken more seriously. Premier John Robarts had lately brought in a new law for “portable pensions” in Ontario. The new law' stipulates that when a w'orker changes his job, he shall have the right to take all of his pension fund with him. And if Robarts had allowed his new law to go into full effect, it would also have compelled most employers who haven't got a pension scheme to install one immediately.
This latter provision, had it become effective, might well have blocked the federal pension scheme. Ottawa could hardly have forced employers to pay another one percent of payroll toward a federal plan, when those whose companies are in Ontario had just accepted an impost by the province. Federal Liberals were nervous because they knew Robarts was furious at Health Minister Judy LaMarsh, who intervened in the Ontario election to make pensions a major issue. But it’s now evident that Ronarts never intended to veto federal pensions: he has postponed the compulsory provisions of Ontario’s law for at least a year, while details of the federal act are hammered out.
Robart’s chief concern was the effect of the federal scheme on private pension funds. Half of Ontario’s employed workers are now covered by such plans, compared to a little more than a quarter of all workers in Canada. Robarts wanted to make sure they could be fitted into the federal scheme with as little dislocation as possible.
The January changes were mainly designed to achieve this purpose. Their main effect was to narrow the gap between benefits at age seventy and benefits at age sixty-five — actually the contributory pension now proposed is worth more at sixty-five, considered as an annuity, than it is worth at seventy. At sixtv-five it is worth $10,200, at seventy only S8.600. It's only the flat-rate pension now that increases if a man keeps on working
past the normal retirement age. Adjustment may still be complicated and difficult, hut at least it will be easier to bring private pensions into line.
There is no doubt that this can be managed. Life-insurance men are still fighting the federal pension tooth and nail, and have not quite abandoned hope of defeating it altogether. But they will admit, somewhat reluctantly, that no matter what law Ottawa finally adopts, “we can live with it.”
Their opposition is not, as cynics believe, solely a fear of losing their lucrative private - pension business. They supported the flat-rate pension from the beginning; some at least would have no strong objection to increasing it further. W. M. Anderson, chairman of North American Life, has been expounding a carefully thought - out plan to make pension rates rise with the age of the pensioner, on the ground that the older the person, the greater his needs and the smaller his other resources.
What scares the insurance men about the new project, aside from its unpredictable cost, is its effect on savings in Canada. It’s estimated that about twenty percent of all capital formation in the country today is done through private-pension funds, Moreover, these have been expanding rapidly of late years, and would go on doing so if federal pensions did not take their place. Canada’s need for capital, especially Canadian capital, is still urgent. Will people continue to save, when they know they’ll get anything up to $225 a month from the government?
Past experience is reassuring rather than alarming on this point. In other countries where state pensions have been introduced, private pensions have increased, not declined — apparently people become more aware of the needs of old age, and find it easier to prepare for them. But when Canada’s new plan goes into effect, Canadian old - age pensions w'ill he the highest in the world — too high, these pessimists fear, to allow' private thrift to flourish.
But this argument, whether sound or not, has been used too often before. Every extension of welfare ever proposed, from the first factory acts to medicare, has been greeted with the same cry of alarm. Perhaps this time there really will be a wolf at the door, hut the voters are unlikely to believe it until they see one. ★