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OTTAWA— Canada’s retirement income system may work well for the mutual fund industry but it’s failing individual Canadians, says a study released today by the Canadian Centre for Policy Alternatives (CCPA).
Risky Business: Canada’s Retirement Income System, by economist Hugh Mackenzie, reviews the performance of the three components of Canada’s retirement income system: Old Age Security; the Canada and Quebec Pension Plans; and the private pension and individual retirement saving system.
It finds Old Age Security and the Canada and Quebec Pension Plans can be credited for substantial reduction in poverty among seniors, especially senior women.
“The Canada and Quebec Pension Plans are among the largest and most successful public pension systems in the world,” says Mackenzie. “That is not cause for complacency, but it is an opportunity. The next phase of pension reform in Canada must build further on that solid foundation.”
Risky Business finds private workplace pensions have been a conspicuous failure. Just over 11% of private sector workers belong to a defined benefit pension plan. Touted as the retirement savings option for middle-income Canadians, RRSPs have not filled the gap.
The study shows lower their income, the less likely Canadians are to contribute to a RRSP; the higher their income, the more likely they are to contribute. In 2010, 16% of tax filers had incomes over $80,000 yet they accounted for 30% of RRSP contributors and 57% of RRSP contributions. RRSPs and PRPPs are a boon to mutual fund managers — who “earn” among the world’s highest mutual fund fees from investors — but fall short on the promise to Canadian retirement savers. Those fees have a significant impact on what an individual can accumulate from retirement savings.
“An individual Canadian who contributes a constant percentage of his or her income over a working lifetime to these retirement income savings plan pays an average of 2.07% annual in investment management fees to mutual fund managers. Over a working lifetime, that soaks up about 36% of his or her retirement savings,” Mackenzie says.
But the problem with RRSPs and their cousin PRPPs, compared with the CPP/QPP alternative, goes beyond high fees. They earn lower returns, even before fees are factored in. And they fail to provide a cost effective way to protect against the risk of outliving your retirement savings. RRSPs and PRPPs, are not an acceptable substitute for a pension plan. When stacked up against the realistic alternative of an expanded Canada/Quebec Pension Plan, they deliver an inferior product at more than twice the cost.
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