Trouble in tomorrowland
Ottawa wants action on pension reform, but business wants to know who pays
At the opening of the National Pensions Conference in Ottawa last week, a tanned and elegant Pierre Elliott Trudeau, looking less like a prospective pensioner than ever, leaned over the podium to ad lib to delegates. “I asked Madame Bégin what I could say that would motivate you to find a solution and she said, 'Devise a great pension schema and announce you
are going to retire soon.’” The audience of 300 representatives from labor, business and the private and public pension industries chuckled appreciatively. It was one of the few shared moments. On the platform, Trudeau, flanked by conference cochairmen Health and Welfare Minister Monique Bégin and Finance Minister Allan MacEachen, spoke optimistically of the government’s role as “listener,” throwing out a challenge to the conference to agree on pension reform. But few of the participants doubted that if they could not reach an agreement soon, the federal government would invoke force majeure. Hanging over the conference was the certainty that the Liberals, prodded by a committed Bégin, will make pension reform their one leading social priority. The message was clear: changing times have created a crisis for pensioners and if the private pension industry
can’t react, the government will.
Demographics explain part of the urgency: the greying of Canada is well under way. Today, one in seven Canadians over 20 is over 65. By the year 2030, one in three will be. That means more than twice as many old people to be supported by proportionately onethird the work force. Couple this with the current phenomenon of double-digit inflation (rates between 1945 and 1972 topped off at four per cent) and life
becomes particularly hard for those trying to stretch incomes pegged to preinflationary dollars. “Two-thirds of our senior citizens are on welfare,” says Bégin. Those are the Canadians who, along with the mandatory Old Age Security ($2,498 for individuals and $4,997 for married couples), also get the Guaranteed Income Supplement (up to $2,508 for individuals and $3,868 for married couples) because they fall below Statistics Canada’s poverty line of $5,286 a year. In 1978, more than half the elderly had incomes of less than $4,600. “Genteel poverty ” is how one social worker in the Maritimes summed it up.
Complicating matters is the hotly debated question of what the government can afford. Stories that the Canada Pension Plan (CPP) was about to go
bankrupt became so commonplace in the past three years that one of the first tasks of the Ontario Royal Commission Report on Pensions (released in February) was to calm fears that the plan would go belly-up by the time today’s subscribers reached eligibility age. Panic struck when actuaries calculated that by 1986 the fund would be paying out more than it was taking in—and by 2001 would be exhausted. The calculations, however, did not take into ac-
count the expected increases in contrig butions to the CPP, which will be the x first since the plan’s inception in 1966. s Nor did media reports of the fund’s imminent bankruptcy consider the safety net of all public pensions—the government’s power of taxation. Still, the question of just how much additional taxation a smaller work force would agree to pay to support an increasing number of senior citizens with rising expectations in a high-inflation economy is anyone’s guess.
The sheer dollar value of pension funds must also be taken into account. Private and public pension funds, estimated today at $50 billion, account for one-third of the gross national product (GNP). By 2031, total pension funds are expected to increase to four-fifths of the GNP. Pension funds control vast holdings—from the Inn of the Provinces hotel in Ottawa to oil wells in the Beaufort
Sea. The Quebec government’s pension fund, the Caisse de Dépot et Placement, has assets of $5 billion with holdings that include, for example, 23 per cent of Domtar. Economists see the size of pension funds as a key factor in deciding whether the public or private sector should expand its pension role. Expansion of public plans could mean the government would have the money to invest heavily in the private sector, a development labelled undesirable by both the 1979 federal Lazar Report on Pensions and the recent Ontario Royal Commission Report on Pensions. At the same time, though studies on this vary, increases in mandatory pension plans might reduce the level of private savings available for capital investmentmeaning Canadian businesses would have to continue turning to foreign investment for needed funds.
But for most Canadians, the pension debate has been taking place somewhere in the stratosphere. Though the outcome affects the lives of everyone, rarely has an issue of such universal concern been treated so long as a universal yawn. “I don’t want to think about making ends meet when I’m 65,” says 27-year-old fashion buyer Pat Grundleger of Toronto. “I’ve got my career, rent increases and facing 30 on my hands now. Spare me old age.”
It can’t be done. Old age, like taxes and death, is a near certainty for most Canadians (the average life expectancy for men is 70.1, for women 77.4). What has transformed the topic of pensions from a last-ditch effort at cocktail party conversation to a topic of national urgency is the realization that the dream of happy sunset years in a white cottage is in trouble. From the government’s point of view, if the private sector doesn’t want more government involvement in pensions, four trouble spots have to be tackled to restore the dream.
Equity for women: A key concern of Bégin’s is the dismal state of Canada’s elderly unattached women (widowed, divorced or single). Few private pension plans have automatic survivor benefits. Housewives are ineligible for the CPP. The longer life expectancy of women coupled with their generally lower wage levels when active in the labor force have resulted in the appalling fact that two out of every three of the elderly poor are women.
Universal coverage: Employers are not required to provide private pension plans for their staff. About 50 per cent of Canada’s full-time workers in the private sector have no pension plan coverage other than the CPP and Old Age Security (OAS).
Portability: With a mobile work force and a patchwork of private plans, most employees find it impossible to transfer
pension plans along with their personnel file and desk contents.
Indexing: Public pension plans are fully indexed to the consumer price index (CPI), currently rising at 12.5 per cent. Private pension plans sometimes have an option of partial indexing to a prearranged ceiling in return for a lower benefit rate, but no private plan has full indexing to the CPI.
Though special interest groups all have their own idea of the shape of pension reform, the pension debate comes down to a confrontation between the government and the private pension industry. Bégin, leaning on the Lazar Report, is aiming at a minimum retirement income equal to the average industrial wage (AIW) for all Canadians (currently $17,000) and 75 per cent of pre-retirement income for middleincome earners. “The CPP and OAS make
up 40 per cent of AIW,” says Bégin. “The question is, where is the other 60 per cent going to come from?” Lined up beside the government is organized labor, which sees expanded public plans as the only hope for full indexing. The private sector splits into two camps: big business, the majority with pension plans and getting used to the idea of improving portability, survivor benefits and providing at least some form of indexing, and the small businesses resisting any mandatory plans.
“I’m barely making ends meet now,” says Doris Magee, owner of a beauty salon in Burlington, Ont. “I have four employees—two part-time. I make contributions to the CPP for all of them, so long as they work over 20 hours a week. By the time I pay CPP and match their unemployment insurance premiums by a 1:4 ratio, I’m close to the line. If I have to contribute to a mandatory retirement plan on top of all this, I’ll just close up shop.”
John Bulloch, president of the Canadian Federation of Independent Business, representing about 58,000 small businesses, adds: “About 89 per cent of our members have less than 20 employees. The average is five. It’s not simply a question of whether a particular pension plan is affordable to the small businessman but whether he can keep up with the total tax burden of UIC, workmen’s compensation, hospital tax in Quebec, which just went up 100 per cent, and so on.”
At the bottom of the problem is the inability of pension plans to change with today’s realities. In the past, the stipend after retirement was a reward for good and faithful service based on 40 or 50 years’ association between employer and employee. With today’s mobile work force, the 50-year anniversary has gone the way of the nickel cup of coffee, but most private pension plans still have length of service conditions. Marion Benson, who has worked 14 years for Vancouver’s Woodward’s department store, may know more about hardware than the other clerks, but she needs to work 25 years to qualify for a full pension. And, if she moves, her pension doesn’t. Federal legislation locks in pensions after 10 years of service and 45 years of age. If Benson leaves, her pension contributions stay in the company fund frozen at the level reached at her departure. She will get a deferred (and reduced) pension when she reaches 65.
Also gone the way of a stationary work force is the notion that old people could rely on their children to look after them. As well, rising divorce rates and the phenomenon of single parent families are adding to the burdens of old age. In Winnipeg, Joycelyne Hutchinson, now in her 40s, has worked all her adult life. Trained as a nursery school
teacher, she abandoned the luxury of career hopscotching when, as a divorced mother with two small children to raise, she decided it “was time to hang on to a job.” The job was copy writing at Eaton’s—for 12 years until centralization made her redundant last month. “Then I discovered part of my pension contributions were locked in, giving me the prospect of a pension of $47.66 a month when I reached 65. Well, I screamed and yelled, but there was nothing to be done. I took the portion that wasn’t locked-in, together with my severance pay (total about $6,000) and put them straight into a registered retirement savings plan. But if you don’t plan ahead, if you don’t ask questions, you’re up a creek. No one is going to look after you in your old age but yourself.”
That cuts to the philosophical heart of the debate centring on the extent to which individuals should take personal responsibility for their needs. One good sign is that registered retirement savings plans have skyrocketed from 348,000 contributors in 1971 to almost two million in 1980. At the same time, both government and private pension analysts agree that the very poor (with the exception of many unattached women) and the rich get a sufficient amount of their pre-retirement income after 65. The poor have a range of federal and provincial benefits that bring them over the Statistics Canada poverty line in terms of cash income as well as housing subsidies, tax credits, prescription drugs and hospital and medical insurance. Many of the statistically poor also own their own homes. “But it’s the middle earner,” says Bégin, “earning in the $20,000 to $35,000 range with family to bring up that I’m worried about.”
In the end, though, much of the dispute between government and the private sector stems from a genuine disagreement over what Canada can afford in social as well as in economic terms. No one disputes that it would be nice to retain three-quarters of one’s income after retirement. But to do so means that people either have to live more frugally now, putting aside a greater portion of their income (whether through savings, investment or taxation) for later on, or they have to oblige a future generation to pick up the tab for their retirement benefits. All reports have warned of the danger of transferring too much responsibility on to the
shoulders of a shrinking work force. Says the Economic Council of Canada: “Within limits, such transfers are likely to be publicly acceptable. If pushed too far, however, the system could be judged unfair and break down.” The call last week by New Democrat Stanley Knowles for a near doubling of OAS (to $500 a month) alarmed many economists. Explains Michael Walker of the Fraser Institute: “The elderly will not pay for these actions. A rapidly aging population that chooses increased benefits will have to fund them by a selection of deficits and bond issues because we simply don’t have the revenue to pay for it.” In one sense, it all seems a curious reversal of ethics. Parents used to sacrifice for their children’s future; now society is flirting with the idea of endangering the children’s standard of living to increase its own.
More importantly, as the government reaches for the laudable goal of a dignified and worry-free old age for all Canadians, many analysts fear that it may strain the economy to the point where all benefits gained will only be an illusion. Indexed pensions will increase in size, but spiralling inflation may make the country’s currency worthless.
At the same time attitudes and expectations of old age are changing. Today’s senior citizen shows a quiet determination to make ends meet. Those people who grew up in the more affluent decades of the ’60s and ’70s have understandably higher expectations for their old age, fuelled in part by government promises. In return for increasingly larger taxes on their income in their productive years, they expect to enjoy a better standard of living than their parents had in retirement.
Whether the government can afford to meet these expectations will be the real moment of crisis. The necessity for the Canadian government to borrow money to meet increased benefits may put further pressure on interest rates already at a record high, not only adding to inflation but also slowing down other sectors of the economy such as housing. Caught between a genuine desire to improve senior citizens’ standards of living immediately and the cruel realities of inflation, the government finds itself in a cross fire. The reality of this dilemma is by now cutting across ideological and party lines. Bégin, for example, is facing some of her stiffest opposition from cabinet colleague Allan MacEachen, usually found on the side of government social initiatives. Recently Knowles, a passionate supporter of increased pension benefits, was asked: “But isn’t MacEachen’s ideology very similar to Bégin’s?” To which he replied, “Oh yes, MacEachen would be fighting beside her all the way, but, unfortunately, he is in Finance.”