While some members of the middle class may be heading for a retirement shortfall, human resources consulting firm Morneau Shepell says that the number of workers who are in serious trouble is "below crisis proportions".
In a recent report, Morneau Shepell's chief actuary Fred Vettese says that lower-income workers can actually expect to have more disposable income in retirement than when they were working and claims they would be would not be significantly better off with an enhanced Canada Pension Plan (CPP).
"It is a little counter-intuitive that the lowest income group [i.e., those with an average household income of $29,000] is also the best protected. The vast majority of people in this quintile are much better off than they were before retirement, even without coverage in a workplace pension plan or an RRSP," reads the report. Mr. Vettese points out that the small number of people in this group who will lack pension income are either new Canadians who have not lived in the country long enough to receive the full amount of OAS and GIS, or people with spotty employment records. "Either way, they would not benefit materially from any enhancement to CPP or equivalent earnings-based program since that would require a substantial record of contributory earnings."
Instead of sweeping pension reforms, Mr. Vettese recommends a more targeted approach to meet the needs of those middle and upper-middle income earners who have "dangerously low" income replacement ratios. Specifically, he recommends creating a supplementary "target benefit" defined contribution plan, and that employees and employers contribute 3% of pay inside a contributory corridor that extends from 1⁄2 to 2 times the national average wage. "A contribution of this magnitude, and in this earnings range, improves net replacement ratios for most people," reads the report.
Those who already participate in workplace plans would be exempt from contributing to this target benefit plan, as would anyone under the age of 30. Finally, he says that the plan should have management fees of less than 50 basis points. "The impact investment fees have on the ultimate level of retirement income should not be underestimated," concludes Mr. Vettese.