Canada needs a new supplementary pension plan in order to deal with shortcomings in pension and retirement savings plans, according to a commentary released today by the C.D. Howe Institute.

Because of these increasing shortcomings, millions of Canadians face large declines in living standards when they retire, according to the Institute. According to C.D. Howe a major new supplementary pension plan for Canadians is the way to solve this problem

In the study, “The Canada Supplementary Pension Plan (CSPP): Towards an Adequate, Affordable Pension for All Canadians,” author Keith Ambachtsheer outlines the factors that jeopardize the ability of Canadians to put away adequate retirement savings and proposes a practical solution to the problem – the CSPP.

According to Ambachtsheer, the existing shortcomings are twofold. First, an estimated 3.5 million Canadian workers have no workplace pension plan, and are not accumulating sufficient retirement savings to maintain a decent post-work standard of living. The second shortcoming relates to the 5.5 million Canadian households who currently have their retirement assets invested in retail products with high sales and management costs. These costs make it difficult for many of the 5.5 million households to generate adequate pension income at affordable saving rates.
Ambachtsheer argues that the first two “pillars” of Canada’s retirement income system – the universal tax-funded Guaranteed Income Supplement (GIS) and Old Age Security (OAS) systems on the one hand and the payroll-deduction-funded Canada and Quebec Pension Plans (CPP/QPP) on the other – should replace 30-40% of working income at the national median wage. Pillar 3 arrangements – private retirement saving through work-place, registered pension plans (RPPs) and individual retirement saving plans (RRSPs) – should lift the total income replacement rate to at least 50-70% of pre-retirement income, and preferably higher yet.

But for many Canadians, low saving and high costs mean Pillar 3 will fall well short of this goal.

To address this inadequacy, the CSPP would have automatic enrolment, investment and annuitization features. Ambachtsheer says the CSPP would ideally be nation-wide, but could also work on a subnational or provincial level.