Cut standard of living now for comfortable pension later: Dodge

OTTAWA — Former Bank of Canada governor David Dodge has dismissed an expansion of the Canada Pension Plan as a “nanny state” solution and is warning that Canadians must decide if they want to cut into their standard of living now to pay for a more comfortable retirement later.

OTTAWA — Former Bank of Canada governor David Dodge has dismissed an expansion of the Canada Pension Plan as a “nanny state” solution and is warning that Canadians must decide if they want to cut into their standard of living now to pay for a more comfortable retirement later.

“It’s a decision between bread now and bread later,” he said in an interview with The Canadian Press on the eve of a key finance ministers’ meeting in Whitehorse focusing on pension reform.

The influential former central banker said proposals to beef up retirement income by forcing everyone to contribute more to the CPP amount to a “nanny state approach” that does not allow for individuals’ preferences in how they want to live out their golden years.

“We have to be a little bit careful here not to impose certain standards,” he said.

While Dodge has been a long-time advocate of strengthening the country’s pension system, he said the better option for reform is to allow for more flexibility and choice by contributors, rather than dictating how Canadians must save.

Finance ministers from the provinces, territories and Ottawa were meeting in Whitehorse on Thursday night and Friday hoping to make some headway in talks about how to improve the income flow for retirees.

Almost two thirds of working Canadians have no registered pension plan coverage and about one-third of Canadian families have no retirement savings whatsoever.

The adequacy of retirement income has deteriorated quickly in the past few years as more and more companies abandon pension arrangements or switch from defined benefit plans to defined contribution plans, which are typically less generous and more subject to market risk.

The global financial crisis and the aging of Canada’s population have exposed the problems of Canada’s pension system and spurred widespread calls for action.

While myriad solutions are on the table in Whitehorse and no conclusion is expected soon, the Canadian Labour Congress, some seniors’ groups, the federal New Democratic Party and others have called for an enlargement of the CPP as a way to make sure seniors have enough money when they retire. They say their solution is simple, takes advantage of a proven system and would be low-cost to set up.

For now, CPP benefits, combined with other federal benefits, give most retirees about $12,000 to live on — requiring a healthy savings account to provide for a decent lifestyle.

Dodge said it is incumbent upon governments to provide more opportunities for Canadians to bolster their savings. But they should stop short at telling them they absolutely must save more, since people should be free to live it up during their working years if they so choose.

However, if Canadians do make the decision that they want more money in their retirement, Dodge said they need to bite the bullet and take a hit to their standard of living now to save more for later. That could be done via a private savings plans or through some kind of government-administered plan, he said.

“There is no magic about this. Whatever fix you come up with going forward is going to imply that people put aside more of their current incomes.”

Nothing governments do can change the fact that working Canadians need to save about nine or 10 per cent of their salary every single year if they want to recoup two-thirds of their current annual income upon retirement, he said.

As deputy minister of finance in the 1990s, Dodge was deeply involved in the reform of CPP in 1997, which raised contributions but also pulled the plan from the edge of collapse and put it on a stable footing.

Then, as governor of the Bank of Canada from 2000 to 2007, he frequently used his pulpit to advocate for fundamental changes to pension law and structure, arguing that many pension plans did not have the incentives to be properly funded.

Now, as a senior adviser at law firm Bennett Jones, Dodge has his own ideas about how to make sure retirees get the kind of pensions they want.

Canadians, generally, have not saved enough, he said, whether it be through their own savings accounts or through corporate plans.

But the issue is primarily a middle class one, he added.

“Phrasing this as a poverty issue is not the case.”

That’s because CPP and other government programs provide enough of an income stream to replace about two-thirds of the pre-retirement income earned by poor people. And rich people can take care of themselves.

Dodge recognized that there are many legitimate ways of accomplishing better retirement income for the middle class. But he also floated a solution that would see governments set up a universal plan that would see Canadians contribute on a voluntary basis, but pay a premium to insure a steady income stream once they are retired.

By making the plan universal, administration fees would be low. By being voluntary, contributors still have the choice to save or not, according to their lifestyle. And by offering up “insurance” at a premium, contributors would be confident about the post-retirement outcome without shouldering the market risk that is the main problem with defined contribution plans.

Dodge’s idea has some similarities with ideas put forward by the Alberta and British Columbia government, as well as the federal Liberals.

The federal Conservatives have yet to put forward their preferences. Finance Minister Jim Flaherty and his parliamentary secretary Ted Menzies have both said they are concerned about insufficient retirement savings among the middle class. But they also stress that Canadian financial institutions have lots of innovative ideas that should be heard.

In other words, a government-led reform is not a foregone conclusion, although government involvement in regulations is inevitable.

Still, Menzies said in an interview last week that the financial services sector needs to do a better job coming up with proposals that are affordable and efficient.

“This is of generational importance for Canadians,” Flaherty told CBC earlier this week.

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