So with all of this mess around pensions what should be done? Well there has been discussion from various groups with potential solutions. One of the more interesting ones was a proposal from CARP (Canadian Association of Retired Persons) which was discussed on the Wealth Boomer blog.
Here’s a summary of the key points:
CARP says pension experts agree retirement income from all sources must replace between 60 and 70% of working income. Currently, the CPP provides at most 25% of Year’s Maximum Pensionable Earnings (YMPE): $46,300 in 2009. Thus, for those without employer-sponsored private pensions, the maximum CPP benefit this year is $10,905.
CARP suggests gradually phasing in a UPP so that coverage would eventually cover 70% of pre-retirement income to a maximum pensionable earning limit of $116,667 (which is the 2009 limit for Registered Pension Plans). Like the CPP, the UPP would be a mandatory enrollment plan. CARP is wary of any version that would let individuals “opt out.”
The issue with a truly universal pension plan is someone still has to fund it. In this case that someone would be you and your company (ie: they raise prices and their customers pay it). So let’s assume for the moment we want to double the coverage of CPP to 50% replacement of YMPE and raise the YMPE to $166,667 (It’s not exactly the CARP proposal, but similar to some others I’ve seen). That would mean that we would need to first double our contributions for both the worker and employer from 4.95% each to 9.9% each and then have to keep paying CPP on just about every dime of income you make.
In a realistic sense this would change the contributions of someone making $75,000 a year from the maximum of $2118 per year now to $7425 under the new proposal. That would be an increase of over 250%, that your employer would also have to match. No wonder CARP is wary of any version that let’s people opt out because you would see a huge number of people willing to take the risk of doing it on their own and keep their money. This would be like the government jacking up taxes by 5% just about every person and business in Canada at every level of taxation.
This unfortunately is the issue with any radical reform to a mandatory plan is it places a huge burden on everyone and I think most of us are not really willing to make that trade for a benefit that we won’t see until we turn 65. I know some people might be with that trade off, but the whole idea is working under this proposal is basically that people are idiots and can’t manage to save for retirement by themselves. We don’t need a nanny state where the government does everything for you since you can’t be trusted to do it yourself.
So where does this leave us? Well I’ll take a try at proposing a solution tomorrow, but in the mean time what do you think of increasing mandatory savings plans? Would you stay in a plan like I outlined above or not?