Coreen ( a PUBLIC Institute of canadien A Actuarie: des actuaires POSITION VEMBER 10, 2015 suman orcisPosmon A CALL TO TIMELY ACTION: Teena 5 been the subject of sovralaies Meeting the Needs of a crossroads due to the convergence > - paee ee oe ore Canadas huturceketinces longevity, prolonged low interest Bee ic ea sc emergence of new types of pension San catalase Daa etae alot defined contribution model, All of | Sa See sean ie sere Can Pedestal aes eee) ae arma ‘The CIA wants to participate in | the debate on how to improve the retirement income system, a5 actuaries have valuable contributions to make due to thetr skills, training, and experience. As well,theprofession is guided by a principle of acting with the public interest in mind. The CIA released a broad public position in ‘April 2015 (A national champion is subject to conditions outlined inthe retirement system will be needed for Canada’s pensioners) and this public position; dificult, but is necessary. Change ‘wants to expand upon the ideas We , pitlar 3— private pension plans _e€ds politcal leadership “and presented. will take cooperation and a coordinated effort by the federal government and the provinces to ensure that we do not miss this and. setirement savings—must be changed to be more effective “The CIA believes the following to help plan members generate sufficient retirement income. Specific changes are discussed opportunity. later in this submission; and + Pillar 1—Old Age Security (OAS) and Guaranteed Income Supplement (GIS)—requires no Samim (Ga 7 Car ae feng The CIA wl be pnd 9 mes uncoordinated vehicles and with stakeholders of the Canadian ‘measures to meet the challenge of retirement system to explore these retirement planning. Enhancing ideas further. + Pillar 2—Canada Pension Plan (CPP) and provincial plans— could be expanded modestly, Mere eens ee ee tens erPRT TC POSITION STRONG Sreniaro aeRO picasa) “The need for change is greatest for Pillars 2 and 3. We observe that the lawback tate for the GIS is 50 percent, which can serve as @ deterrent for people who qualify for the GIS to seek additional sources of income. PILLAR TWO: PAs Tin NOTE Many government-sponsored proposal, offering additional retirement income to Canadians, have been discussed. ‘They include the following + The Québec longevity pension proposed by the expert committee fon the future of the Québec retirement systems +The Ontario Retirement Pension Plan (ORPP) proposed by the government of Ontario; + A mandatory increase in Québec! Canada Pension Plan (Q/CPP) contributions and benefits and + Avoluntary supplementto the CPP “The rationale for these proposed expansions of public pension plans is based on certain assumptions, which must be challenged to ensure public plans are properly designed to address the real problems. 1. Are Canadians saving enough for retirement? “The aforementioned government sponsored proposals often refer to the number of Canadians who are not saving enough for retirement. This may notbea very meaningful number. There are several reasons why an individual may choose not to contribute to theit retirement savings for example: + For low-income earners, current government benefits and/or spousal pension benefits may be sufficient, and + For young homeowners, contributing additional funds to mortgage repayments may be 4 priority. Deciding to save for retirement at a later date may be appropriate, Counting those who do not currently save is not necessarily a reliable indicator that savings will not be sufficient later at retirement. Recent analysis, uch asthe C.D. Howe commentary 428, "Do Canadians Sare Too Lite, has demonstrated that most current pensioners have saved enough to live comfortably after retirement; some of them may hhave benefited from high returns and rising housing prices. We recognize that some pensioners are straggling, in particular, singles and immigrants However, low-income earners do not need to save for retirement and can rely on existing government programs. If these programs are not sufficient for low-income earners above a socially acceptable minimum, then it should be addressed within Pla 1 Several. studies have attempted to project the number of Canadians in future generations who are at risk of seeing significant decline in their standard of living. These studies have limitations when formulating public policy, as they rely on assumptions on ‘whether and how future generations will change thelr behaviors towards retirement planning, Consider the following: + Will saving increase as one gets loser to retirement? + Will individuals retire later than the current generation of retires? + Will individuals work part-time after retirement? + Will individuals use some of their housing capital after retirement? + Will individuals transfer less to their children upon their death? ‘Assumptions based on behavioral changes are unreliable. What is likely to occur is that future generations will make changes to prevent an ‘unacceptable decrease in their standard of living at retirement, Whether these Changes are sufficient and should be relied on in formulating @ public policy is controversial. Some argue that saving more, retiring later, and working part-time will be sufficient for many. Others are concerned that this may rot be sufficient for middle-income eamers. More analysis should be ‘considered and help in understanding ‘what behavioral changes would be ‘encouraged to prevent an unacceptable decrease in standard of living 2. What isthe appropriate replacement ratio? Some proposals calling for the expansion of public pension plans often refer to a desirable target replacement ratio of 70 percent. This ratio is too high for many and isnot a useful benchmark ‘chen debating the role of public plans. Each individual should have a personal target of how much of his standard of living should be maintained after retirement, Such a target will vary: + Higher for low-income eamers (mostly provided through Pilar 1); + Lower for those who have re their mortgage during their ‘working careers, + Lower for those who have raised children: and + Higher for those who are single. “This is also a mater of personal preference. Some may prefer to Consume more before retirement and others more afer retirement, Income needs in retirement is discussed in the paper Moving Beyond the Limitations of Traditional Replacement RatesPUBLIC POTN ——————————— (MacDonald and Moore, 2011). + Whether public pension plans decreases in interest rates and low ‘This paper demonstrates the serious should be improved to reduce expected rates of return on capital, shortcomings of using a universal gross the risk of a future untllled gap at as well as increasing longevity. replacement rate to evaluate whether retirement; or + Many are saving through mutual individuals ate able to maintain pre- , Whether the private sector should __funds with high fees, even though retirement living standards after” ye gesponsible to ensure that this more. efficient alternatives are ferrement sap be fille. available ‘The role of public pension policy Relying solely on the private sector to Furthermore, the private sector faces eae tof Yeur fancinaia ella oe see ree a are shld ot be > fay aan © fe sgs psi rbimais| the chalga me the ae cr mubiiy should beleg to * Prva setor employers are $scumoles® te mow wheter Sediiduale Theprivteseciormasraleo ™lactant to be involved in the CNG cpdide haere be given a role in helping Canadians "Fement of their employees. Canadians. ove ore ee es the Pte g oe aera a Cecectrany: | Me tare jclwedl down ther SE ee eer neat a emer etnine defied benefit (DB) plans and "eA na they Providers to fanerate products and ‘placed them with less-ezpenstre Ea sn ae reer awtineoudyin orderte meet defined contribution (DC) plans, eed aststancs the needs of Canadians. + There is little evidence that shows F&t these reasons, we believe that, if Registered Retirement Savings Properly designed, there can be a role Reet ea DCeenttatons fF 8 modest expansion of Pillar 2 0 ce ietanin oceeli wg e Cote nes reer ene Seopente ‘he veer of WelBy ou th conditions that mot be neti an expansion of Pilla 2 “The questions we should be trying to answeronthisisueincludethefollowing: CONDITIONS FOR EXPANSION ‘The CIA would support an expansion of public plans whether through the C/QPP or a new provincial plan such as the ORPP, ifthe following conditions are met: 1 Theexpansion is targeted toward those with the greatest need, often identified asthe middle-income group. 12, tdncome earners should not be required to contibote tovards en expansion a ten public plans are generally meeting their needs, and as the current GIS clawback provides disincentives to those who save. “There is no transfer of cost to future generations. Full benefits are gradually earned over the career period after 3, implementation. There could be transfer of risks to future generations; this may be unavoidable unless the expansion takes the form of a DC supplement. “There is a reality that the assumptions made on future returns, salary increases, and longevity will not be accurate. Some of the principles underlying shared risk plans should be considered for plans in Pillar 2. The A, financial eflect ofthis will have tobe shared between generations, and this will needa clear policy tht states that benefits and contributions will be adjusted according to experience, In particular future indexation to retirees should be conditional ‘The contributions and the resulting assets are clearly distinguished from the current C/QPP contributions 5 and assets. Otherwise, Canadians wll have dificlty understanding the diferences in contributions, earings covered, indexation, ee. 6 _ Hla Canadians ofall provinces shoud be gven aces to euch an expansion so that the private sector does not have to adjust plans and products according to province of employment. Cur thinking on whether an expansion should be provided through a voluntary expansion of the CPP has been discussed in our separate submission tothe federal consultation on CPP expansion that is currently under way CANADIAN INSTITUTE OF ACTUARIES