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Post-war baby boomers and their pension plans

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

In a report released today, Statistics Canada discusses the coverage and composition of registered pension plans (RPPs) in the country as of January 1, 2009. There are significant economic implications. The report presents the facts. Most of the analytical comments are my own.

In a report released today, Statistics Canada discusses the coverage and composition of registered pension plans (RPPs) in the country as of January 1, 2009. There are significant economic implications. The report presents the facts. Most of the analytical comments below are my own.

As the post-WWII baby boom generation continues to age, pensions will become an increasingly important topic on the national agenda. Discussion is likely to focus on three key areas.

First, in the coming decades, an increasingly large proportion of the population will be counting on pension money to finance their consumer purchases. Those without pensions will, at some point, no longer be able to maintain their previous spending patterns, acting as a drag on GDP.

Second, there is an increasing dichotomy between those covered under public pension plans and those in the private sector. Payouts and benefits under the former now tend to be more generous than the latter. Plus, there is another aspect to this encompassed in the following.

Third, defined-benefit pension plans (where pay-outs are specified) may or may not prove to be more beneficial to recipients than defined-contribution plans (where contributions are fixed but the pay-out depends on the level of investment success that has been achieved.)

The drop in interest rates in recent years has tended to make defined-benefit plans more advantageous for pensioners (but less so for their sponsors). At the least, they are a good deal more predictable as far as future income streams are concerned, lessening anxiety.

Defined-benefit plans remain quite prevalent in the public sector. They are rapidly disappearing in the private sector, to be replaced by defined-contribution plans.

The number of registered pension plans (RPPs) in the country, as of January 1 2009, was 19,200.

Membership in registered pension plans increased 1.7% during 2008 to stand at 6.0 million.

All of the growth in pension membership in 2008 came from the public sector.

Overall, membership in pension plans in Canada is about half men and half women. Furthermore, the breakdown between public and private sector membership is similarly half and half. However, there are far more workers in the private sector than in the public sector.

The proportion of total pension membership that was covered by defined-benefit plans was 75% in 2008. But that was down from 85% ten years before.

The proportion of all pension membership with defined-contribution plans was only 16%.

Hybrid plans have been on the increase. The most common kind has sponsors placing new workers in defined-contribution plans, while veteran employees stay in defined-benefit plans.

Here’s where the statistics really take on meaning.

Only 38% of all employees had an RPP in 2008. The coverage rate in the public sector was 84%. In the private sector, it was only 25%. How will these uncovered individuals sustain themselves in their retirements? The CPP, QPP and other top-ups provide only so much help.

Due to the economic downturn, 75% of RPPs had a funding deficiency at the end of 2008. In other words, their liabilities were greater than their assets.

With experience over extended time frames, companies have learned to prefer defined-contribution plans. That way, their financial commitments are known and fixed. Plus, they are undertaken in the present rather than left open for some future resolution.

To their regret, many firms have discovered the high costs that can come with defined-benefit pension plans. In previous decades, when interest rates were higher (averaging 7%) than they have been of late, it was relatively easy for a company to put aside some capital and rest assured that the funds would grow to cover longer-term pension costs. That approach is no longer viable.

On the surface of it, the public sector doesn’t have to worry about revenue shortfalls to the same degree as industry. In a pinch, taxes can be increased or the funds transferred over from some other budget item. However, in the long run, inequities in public-sector pension funding capacity versus the private sector will become increasingly contentious. The potential for backlash from retired private sector workers versus their public sector counterparts appears high.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick last update:May 26, 2010

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