Downsized dreams

Retirement plans are being dashed by a new economic reality


Downsized dreamsLike most young men growing up in Thunder Bay, Ont., in the 1970s, or anywhere on the planet for that matter, Alex Cryderman was too focused on the next weekend to give much thought to his golden years. So, at 21, when he followed his father and brother into a job at the Abitibi paper mill, and learned that part of his paycheque would be held back to fund his pension, he was more annoyed than anything. That feeling changed over time, of course. And as the months turned into years and the years to decades, Cryderman, now 50, came to rely heavily on his pension savings for the retirement plan taking shape in his head. “I was going to be out of here in five years with a pretty good pension,” he says. “I was going to spend time on my boat, fish, travel with my wife, really live the good life like they say in the ads.”

Then one morning earlier this year, Cryderman awoke to frightening news—Abitibi-Bowater had filed for bankruptcy protection. Suddenly, his pension, along with those of 8,000 other employees at the company, was at serious risk. With the stock market collapse and the company no longer paying into the pension fund, the plan has become dangerously underfunded. Now Cryderman can only wait, and regret—wait to learn how much of his retirement savings he’ll be able to salvage, and regret not putting more money away on the side over the years. “If you’d have known what was coming down the pipe, you’d have lived your life differently,” he says. “We never thought this day would ever come.”

It’s become an all-too-familiar refrain across the country. Employees in industries as diverse as technology, media, forestry and manufacturing are all seeing their pensions evaporate before their eyes as companies falter and creditors put them under the knife. But it’s not just those workers lucky enough to have a pension who’ve been side-swiped. After all, more than 60 per cent of Canadians have no such safety net at all. For the unfortunate majority, market turmoil has pummelled what little savings they’d managed to tuck away. In 2007, according to a poll by RBC, the average Canadian with an RRSP had managed to save just $72,481, but since then the market has fallen a stunning 23 per cent. And for those younger workers who still have years left to save, there’s the prospect of about 10 million baby boomers retiring over the next 15 years—a huge demographic shift with the potential to cripple the country’s finances and drive up taxes if it’s not handled smartly. “Suddenly everybody has woken up to the fact that two-thirds of retirees are going to be underfunded,” says Glen Hodgson, chief economist with the Conference Board of Canada. “There’s a huge danger right now that we’re under-saved as a nation.”

Put it all together, and Canadian workers of all ages are now coming to terms with a daunting realization—unless you’re lucky enough to have an ironclad, taxpayer-backed government pension, or rich relatives, your dreams of retirement are now truly out of reach. We aren’t about to go back to the early 19th century when many workers toiled seven days a week until the day they died. But the cherished notion that at some fixed date in the future workers can put down their wrenches or log off for good is coming to an end.

The idea of taking time off at the end of your working life to kick back and enjoy your final years is a relatively modern invention. In 1889 German chancellor Otto von Bismarck crafted the world’s first government-supported pension for workers once they hit age 70 (it later became 65). That wasn’t much of a concession, though. The average life expectancy at the time in the country was just 40. “He was a brilliant general and a very clever actuary,” says Moshe Milevsky, a professor of finance at York University’s Schulich School of Business. “He knew few people got to that age so it wasn’t expensive. Since then retirement has morphed into a very long vacation that’s simply not sustainable.”

Happily, today most of us see 40 come and go with little more than a few cheesy mid-life birthday cards and maybe a new sports car. But the idea that 65 would be the point at which we punch out from work for the last time has stuck. And this is the root of many of the problems governments, companies and workers now face. In the 1950s, just a decade before the Canada Pension Plan (CPP) was created and set 65 as retirement age, life expectancy was just one year past that. Today, the average life expectancy is 80 (more for women, less for men), and some time in the coming decades, thanks to medical advances, it may well hit triple digits.

Yet rather than working longer, many of us have been choosing to leave our jobs earlier. Since 1976 the average age of retirement in Canada has fallen from nearly 65 to 61, while many workers in the public sector now leave their jobs before they even turn 60. What this means is workers are spending less time in their earning years, yet expect to spend even more time living off their depleted nest eggs. It doesn’t take a math teacher to explain the flaw there, though it does help to use one to illustrate the point. The average teacher in Ontario retires at 57 yet has a life expectancy of 90, says Robert Brown, an actuarial scientist at the University of Waterloo who has dug into the data. In other words, that math teacher will potentially spend more time in retirement than working in the classroom.

For government employees with defined benefit (DB) pension plans, like teachers, garbage collectors, police officers and postal workers, this isn’t a terrible concern. DB plans are by far the most luxurious form of retirement savings out there, because they guarantee retirees a fixed payout that often rises along with inflation. About 80 per cent of public sector workers enjoy DB plans, versus just 23 per cent in the private sector. But if teachers don’t have to worry about their pensions, taxpayers sure do. These comfy plans are a huge public liability. Should a public sector pension fund come up short, taxpayers will be on the hook to bail out retirees.

The prospects are far worse for those in the private sector. DB plans are rare and growing rarer. Instead, those private sector workers fortunate enough to have a pension at all are mostly enrolled in defined contribution (DC) plans. In that type of plan, payouts to retirees depend entirely on how much money is put in, as well as how well it is managed. With the plunge in stock markets last year, and the recession, many DC pension plans have been devastated. But the same goes for many private sector DB plans, which face huge shortfalls. In the case of AbitibiBowater, an audit is being carried out on the pension fund, but it’s expected to be underfunded by between 20 and 25 per cent. Meanwhile, retirees at Nortel, which filed for bankruptcy earlier this year, could see their pensions cut by more than 30 per cent, forcing some retirees to return to work to make ends meet. So even as workers are possibly looking at decades in retirement, their pensions are proving wholly unreliable.
The Dwindling Workforce

Making things worse, fewer and fewer companies are offering their employees a pension plan of any type, leaving workers completely on their own when it comes to retirement saving. Over the last 20 years the financial service industry has honed its message to this ever expanding group, with a barrage of commercials every RRSP season. The message: put a little away each year, and you too can enjoy freedom at 55 to stroll windswept beaches and spend summers at the cottage with the grandkids. It all sounds nice, but there’s little to suggest that coming generations will be able to realize that dreamy version of retirement.

When the Dow Jones Industrial Average passed through the 10,000 mark last week, loud cheers went up, heralding it as a return to stability. But like some bad horror movie where the heroes are lost in the woods and walking in circles, we’ve criss-crossed through 10,000 at least a dozen times since 1999.

Is it really any wonder then that younger Canadians—those most likely to be without a pension plan—are shunning the markets? According to a survey released by TD Canada Trust last month, workers between the ages of 18 and 34 said they are saving as little as 10 per cent of their income. That’s down considerably from the 29 per cent that Canadians over 55 recalled saving when they were between those ages. There’s probably some historical revisionism on the part of older Canadians in the survey, but it fits with many other studies conducted in recent years. That will only exacerbate the problem as those younger workers approach a retirement that could stretch into four decades. “Gen-Yers face the worst of it, but I don’t think they’re aware of it at all,” says Milevsky.

But there’s an even bigger problem looming in the future. Just as Canadians are living longer, there are fewer of us being born. Canada’s fertility rate of 1.66 children per woman, while up slightly in recent years, is still near record lows and creating serious unbalance. The declining ratio of workers to retirees threatens to create a huge burden on future generations. Today there are about five workers for every retiree over the age of 65, but by 2031 there will be just two people working for every one in retirement, according to Statistics Canada. “The ratio of workers to retirees is dropping and it will continue to fall for another 20 years before it levels out,” says Malcolm Hamilton, an actuary with human resources firm Mercer. “Nobody is really sure what the implications are, other than they could be profound.”

One very real possibility is that health care and Old Age Security costs are likely to surge, forcing governments to hike taxes on the shrinking workforce. There’s no real threat of the country going bust, says Jonathan Kesselman, a public policy professor at Simon Fraser University, but it will become a huge political issue. “How much will the working population in the year 2030 be willing to see their taxes go to support old folks, versus supporting the things they want, like better highways, schools and health care for themselves?”

If you want to see where we could be headed in all of this, look across the pond to Europe. Last week, a report submitted to the European Union warned that the mass of retiring workers is a time bomb waiting to go off, and could do far more damage to countries’ finances than the recent bouts of deficit spending. “Though the debt and deficit increases are by themselves quite impressive, the projected impact on public finances of aging populations is anticipated to dwarf the effect of the crisis many times over,” the report stated. The only real answer, the EU was told, is for workers to curb their retirement expectations and stay on the job longer.

In some ways, Canada is better off than many other countries. Reforms in the 1990s closed the funding gap for the CPP, and this country’s relatively low debt as a share of GDP should leave more fiscal room to manoeuvre if the demographic crunch becomes serious. Last week, a report by Mercer ranked Canada’s public and private pension system fourth out of 11 countries. And there are other things that can still be done to try to repair the retirement system. Unions would like to see CPP payouts expanded. They have also called on government to protect workers’ pensions in the event of corporate bankruptcies. This December provincial finance ministers will meet in the Yukon to discuss the pension crisis.

But whatever solutions they propose, many experts say there’s no getting around the fact the 30-year retirement has become unsustainable. We’ve already seen governments in Canada take some steps to keep workers in the labour force longer. Provinces like B.C. and Ontario have abolished mandatory retirement legislation. Earlier this year Ottawa proposed changes to the CPP, set to take effect in 2011, that reward workers who stick around until they’re 70. More is needed, according to a study released by the C.D. Howe Institute in July. In addition to encouraging Canadians to have more babies, and hence more workers, the report said Canada has little choice but to push back the age of retirement. “Advances in longevity and shifts toward later workforce entry and less physically demanding occupations mean that the equivalent of working until age 65 in 1970 is now working until at least age 70,” the report said. At the very least, says the University of Waterloo’s Brown, workers should be encouraged to give up the idea of early retirement and stay on the job until 65.

So perhaps it’s a good sign that more workers plan to keep working in some fashion after they retire. Last year, in another RRSP-season survey, RBC Financial found that more than half of workers under the age of 55 plan to work as long as possible, even if they have the money needed to retire.

Besides, maybe working longer isn’t such a bad idea after all. Just last week researchers at the University of Maryland found that retirees who take on temporary or part-time jobs related to their fields suffer from fewer diseases and mental health problems than those who opt for full-time retirement. For workers like Cryderman, who toil in mills, mines and factories, that’s not an option. But it’s a message other workers might pay attention to. After all, they probably won’t have a choice anyway.


Downsized dreams

  1. A good article. Shows you to what extend, the establishment will go, to instill fear in the population so it will work untill they die. More gravy for them. Time to throw them a curve. Get out as soon as you can. Down size your life style to the point you can retire early. Quit contibuting as soon as you can. The more they can get out of you the richer they get. If their system looks like its going to blow up in their face the sooner they might give protect your pensions more than their profits. First thing is to remove all your dollars and store them under your mattress. Without you consuming they are toast. If it results in one thing, putting workers pensions at the top of the list in business failures, then it would be worth it. Its the only way you can fight them. otherwise they will keep ripping you off.

    • That will teach the world a lesson!

      Actually, there is a guy that pushes a shopping cart down my back alley and collects bottles out of the garbage that already adheres to your ideal lifestyle. He is really sticking it to the man!

      Except he doesn't look very happy.

  2. “Suddenly everybody has woken up to the fact that two-thirds of retirees are going to be underfunded”

    How did this come suddenly?! Most company pensions have been underfunded for years, the savings rate has dwindled to next to nothing over the last two decades and we know there was going to be a wave of retiring baby boomers, well, since the baby boomers were born!

    This is not a flash flood, it's a storm that's been building for over twenty years now and should have been aparent to everyone who picked up a newspaper every now and then. The sudden bust of so many pensions just brings to the surface what's been there all along – baby boomers have not saved enough for retirement.

  3. "But if teachers don't have to worry about their pensions, taxpayers sure do"

    We sure do as per the 'Partnership Agreement' that Taxpayers never signed:

    Ontario Teacher's Pension Plan Deficit and the upcoming Pension Crisis 2014:

    Teaching the double dip
    Retirees can add $41,000 to their pension for 95 days of supply teaching. Is that right?


    Teachers double-dipping.
    Taxpayers paying for it.

  4. 1. Phase it to 70.
    63 and older? no change. Carry on. No worries.
    60 and older? make it 66.
    55 and older? make it 67.
    45 and older? make it 68
    45 and younger? make it 70.
    2. Increase CPP/QPP contribution rates from 9.9% to 11.5%.
    3. Change the immigration system to put slightly more emphasis on immigrants under 35.
    4. Increase the tax benefit on putting money in RRSP's by 50% (increase the penalty for withdrawl by 50% too)
    5. Quadruple the monthly childcare benefit from $100 to $500. Increase GST from 5% to 6.5% to pay for it.

    There. Pension crisis MORE than solved. UBER solved.

    Now where's my government of Canada 500k consulting cheque? I can put my recommendations in a nice powerpoint if necessary. I can also do the actuarial calculations (really, I can). Where's my money? If you have no money, I will accept an Order of Canada. Thank you.


    • Great suggestions. The GST increase won't fly but the CPP rate increase and the RRSP benefit change are a great starting point. I'd be happy to pay moree CPP as long as the Gov't can guarantee that the money won't be dried up when I hit retirement 20 years after the baby boomers have sucked the pot dry.

      I'd like to hear how you'd go about fixing the health care overspending crisis that will coincide with this issue. Politicians will finally be earning their money in the coming years.

  5. Putting pension fund at the front of the line is a good idea, but not a solution.

    Pensions are becoming scarce in the private sector and have exploded in the public sector. Lets end the lunacy now. The infrastructure is in place under the Canada Pension Plan to turn it into a foundation for everyones retirement. Increase the payout to $2,000 per month and let people save outside of CPP to improve their retirements.

    Taxpayers no longer want to be on the hook for lavish government employee retirement benefits, pensions and freedom 55. Taxpayers do not want to be on the hook for Chrysler and GM pensions. Lets take everybody off the hook for things they don't have. 65 to 70% of the Canadian workforce has no organized pension

  6. Good ideas—where can I vote for you???

  7. Jason,you missed one important point. DC plans are subject to "locking in" provincially. In Ontario I'm allowed 6.94% this year and 7.037% in 2010. This resets evey Jan 1. Each province has a different
    locking factor. Saskatchewan unlocked their pensions 100% in 2002. The rest are all over the map. Ontario is 25% unlocked this year and goes up to 50% Jan 2012. You can say where it is invested but you just can't touch it. If there are no more increases here in Ontario, I'll be able to access my fund 100% when I reach 90 years of age.
    As for the CPP we should make it into a universal pension plan. By that I mean each person 's plan is under their multi-part SIN#.
    SIN# Basic contribution as it is now.
    SIN#-A Voluntary tax sheltered contributions instead of an RRSP.
    SIN#-B Company contributions to employee's plan.
    SIN#-C Employee's contribution to company plan.
    This plan would allow your money to ride along in the huge CPP fund. You gain all the benefits of being in the market which historically has outperformed all other types of investments. Also you wouldn't be robbed by hidden fees like brokerages and mutual funds charge.

  8. Sorry Ont goes up to 50% Jan 2010.

  9. The only ones with a guaranteed pension are government employees. Indexed too. All courtesy of those of us that work for a living. and have no say in how our tax dollars are squandered.
    The company that I work for pays me $2.60/hr for pension. Added to my cheque every two weeks. Up to me to look after it from there. Best system around other than cash jobs.

  10. Government (paid by tax payer) pensions will never be compromised. Just look at what the politicians pay themselves for a mere few years service on a lavish position such as an MP or MPP. Nothing short of civil disobedience will stem the tide of excessive government self indulgence.

    How about the 2 plus billion squandered on the long gun registry? That would have helped a hell of a lot of pensioners…. No?

  11. "In 1889 German chancellor Otto von Bismarck crafted the world's first government-supported pension for workers once they hit age 70 (it later became 65). That wasn't much of a concession, though. The average life expectancy at the time in the country was just 40. "

    That's the answer then. You don't collect CPP until the age of 130. Problem solved. If you can't self fund your retirement, you don't get one. Makes perfect sense to me.

  12. It's not how big your pension is, it's how much will it cost to live in retirement. In Winnipeg, a retired couple with no mortgage or car payments and paying for Blue Cross health insurance can live quite comfortably (covering all food, clothing, shelter, transportation and health costs) on $2,000 worth of expenses. After tax, this same couple will get approximately $2,600 monthly from CPP (at 90% of max) and OAS. No doubt that costs are different in different parts of the country, but the fact is retirement is not like going on holiday. People should not expect to spend thousand of dollars a year on leisure, nor should they expect someone else to pay for it, either through subsidized pension plans or preferential tax treatment.

    • Guy:
      –You stated "After tax, this same couple will get approximately $2,600 monthly from CPP (at 90% of max) and OAS."
      –I beg to disagree, $2600 is approximately what they get before taxes are deducted. Current CPP max is $908/month so 90% gives you $817 each. OAS max is $516/month. So the couple grosses $2666 before taxes assuming they don't get the OAS supplement.
      –It's not much to live on comfortably unless one has no life. Just existing. Iif they have no other source of income, they are poor, period .

      • Ahh, I have to retract a bit. Considering that each is grossing only about $16,000 each (Cpp&OAS), and coupled with the senior tax credit at 65, they would pay very little tax.

  13. Guy:
    –You stated "After tax, this same couple will get approximately $2,600 monthly from CPP (at 90% of max) and OAS."
    –I beg to disagree, $2600 is approximately what they get before taxes are deducted. Current CPP max is $908/month so 90% gives you $817 each. OAS max is $516/month. So the couple grosses $2666 before taxes assuming they don't get the OAS supplement.
    –It's not much to live on comfortably unless one has no life. Just existing. Iif they have no other source of income, they are poor, period .

  14. Years ago when the CPP was started up in 1966, it should have had a more ambitious goal. Some talking heads have made good suggestions that instead of capping the pensionable income level in regards to deductions, it should have had a higher amount. The current cap on pensionable income is about $45000 and the CPP aims to replace only 25% of that when one retires at 65. Also the premiums should have been higher for people without company pension plans so that they can have some sort of decent guaranteed pension when they retire.

  15. The article fails to mention that the pension account paid by federal public servants was 'raided' for 30 Billion dollars in the Cretien/Martin era to pay down the debt/deficit.

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