Many people have difficulty planning for the future. Perhaps this is due to the fact that our brains are still hardwired from our cavemen/cavewomen days where we primarily had to address immediate as opposed to long term issues. Our ancestors likely had such concerns as determining the best strategy for sneaking up on animals during a hunt, which creates a low priority for long term planning, considering cave people were lucky to reach the age of 30.
Unfortunately, in today’s world, not thinking about saving for retirement can have dire consequences. With the decline in private sector pensions, a large proportion of the population nearing retirement will face serious financial issues, leading to a lower quality of life for seniors as well as an increased financial strain on government, unless policy measures are put in place to ensure adequate income for retirees. According to an August Globe and Mail article, Canada’s personal savings rate is now under 3%, significantly lower than the United States, and down from around 14% in the early 1990s. Coupled with a long term decline in private pension plans, an increased life expectancy, and the fact that our Canada Pension Plan will be inadequate in providing a livable wage for retirees, I feel that Canada risks undermining our notion of equality by failing to adequately support retirees.
The consequence of having a large group of low-income seniors is an increased strain on government services and finances. There will be a need for more subsidized housing, as well as government funded nursing homes as cash-strapped seniors are forced to sell their homes. Moreover, there will be an increase in stress and depression among seniors caused by strained family relationships as many will be forced to be seek financial support from their children, leading to more health issues and an increase in government healthcare costs. In 1957, the federal government recognized the importance of retirees being able to support themselves in retirement, and introduced the Registered Retirement Savings Plan (RRSP) to address this issue. More recently, in 2008 the federal government announced a new incentive to encourage saving in the form of a Tax-Free Savings Account (TFSA). This program allows Canadians over the age of 18 to contribute $5000 per year to an account, with any investment gains earned tax-free.
TFSA participation rate according to Bank of Montreal is only 36%, which is quite low to me considering how powerful this account can be. RRSP contributions are also relatively low, with few Canadians maximizing their contribution room. Federal Finance Minister Jim Flaherty recently requested proposals on how to encourage saving, and received a report by a committee of senators which recommended, among other suggestions, that the contribution room for TFSAs as well as RRSPs be increased. Creating increased incentives to save as recommended by the committee of senators is useful, but I feel it is too regressive; the plan will largely benefit wealthier Canadians who already possess the resources and foresight to plan for retirement. This group is likely already saving for retirement, and are therefore ahead of the game compared to most. The larger issue that needs to be addressed is how to support Canadians who may not necessarily have the discretionary income or financial knowledge to purchase financial products in order to effectively save for retirement.
If voluntary savings programs are not succeeding in solving the problem, I propose it’s time the federal government turn its attention to expanding a mandatory saving program: the Canada Pension Plan (CPP). The CPP is quite successful, with the Chief Actuary of Canada stating that the plan is ‘robust and appropriate’, and that it will be able to sustain itself until at least the year 2075. Currently, all Canadians have CPP deducted from their income, with their employer matching that contribution. In return, all retirees receive a steady albeit low income stream from this program. By increasing the mandatory CPP contributions, it will be possible to enhance the CPP payouts for retirees while still ensuring that the plan is sustainable in the future. Some businesses would oppose this plan, as it represents a payroll tax, which decreases their earnings as well as reduces efficiency by making it more costly to hire employees. However, as outlined above, the costs of not addressing this issue are great, as failing to do so will increase costs for social programs, while doing so will strengthen our country’s social safety net and ensure that our Canadian notion of equality is upheld.
– By Matt Warwick