Economic Crisis is Uncovering Deeper Problems
Apr 22, 2009
Most people are well aware of the terrible effects that have resulted from the economic downturn that’s made its way across Canada over the past year: the lost jobs, the bankrupt companies, and the closed manufacturing plants. But an arguably larger and definitely less acknowledged effect of the financial meltdown has been the way it has decimated the retirement plans of millions of Canadians in a very short period of time.
A lot of the money that Canadians have been diligently squirreling away in RRSPs over the years has taken a hammering to the point where many now question the point of continuing to contribute at all. The value is even more uncertain when one looks down the road 15 or 20 years.
While it’s true that nobody escaped the effects of the market downturn in the last year or so, it’s hit those nearing retirement particularly hard, as these are people who have done most of the savings they’re going to do in their lifetimes. Things will get better – jobs will return and plants will reopen – but for tens of thousands of Canadians their nest eggs have taken a hit from which they may never recover.
This economic crisis has uncovered and illuminated a deep and growing problem for the middle class. Years ago, most working Canadians would have been okay in situations like this because they could always rely on their employers to fund their retirements with reliable pensions. However, a recent study by the C.D. Howe Institute has shown that less than 20 percent of private sector workers have a guaranteed pension plan, and that number is declining. Furthermore, Statistics Canada numbers indicate that the net worth of Canadian households dropped by eight percent (or $14,000) on average in the last half of 2008.
Even those with pensions are getting nervous. Quebec’s pension plan, which is one of the largest in Canada, recently announced that its assets had dropped by $40 billion (25 percent). Ontario’s municipal employee pension fund lost $8 billion last year. And Air Canada’s pension is facing a $3.2 billion shortfall in addition to the company’s recent financial troubles.
Those without a pension plan, or with a weaker defined contribution plan that doesn’t guarantee annual payment amounts, are left on their own to plan for retirement. And people haven’t exactly been saving over the last decade, as credit and household debts increased dramatically. According to Statistics Canada, one-quarter of Canadians neither have an RRSP nor a pension plan.
Many argue that the real fix lies in reforming the pension system. Today’s system is one of two extremes. There is a substantial plan for public servants, and then there is a spotty system whereby some companies offer plans of different qualities to their employees. With very few exceptions, the private system has smaller benefits, significantly higher risks and higher operating costs.
The recent financial recession is causing governments to take action. British Columbia is proposing to launch a new province-wide plan next year that would allow employees, employers and the self-employed to voluntarily join. There is speculation that Alberta and Saskatchewan could follow down this road as well. And the federal government has been holding hearings on how to improve the pension system on a national level. It’s clear that new thinking and concerted effort is required to address this problem before it becomes unfixable.
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Canada's corporate taxes are lower than in the United States. Overall, we're taxed about the same.
Big Dawg - 2009-04-22 14:52