Pooled pensions may not help low, middle- income workers
Much- touted new federal plan offers little and could be costly
Perverse provisions of federal tax laws will undercut any modest benefit that most low- to middle- income workers might otherwise hope to get from the federal government’s much- touted Pooled Registered Pension Plan legislation that was passed in June, according to a new study.
Simply put, many workers should avoid these plans unless and until they are improved, say Toronto lawyer James Pierlot and Alexandre Laurin, the associate director of research for the C. D. Howe Institute, in an analysis released Thursday.
The only advantages of the new PRPPs are provisions for partial pooling of investments and the waiving of payroll taxes on contributions, the authors say.
The numerous drawbacks include one that is a key weakness in conventional Registered Retirement Savings Plans — the reality that trivial tax savings on contributions from low- income workers during their working years are overbalanced by significant losses in retirement when any benefits paid are not only taxed, but also erode eligibility for public pension supplements and other benefits. In two case studies, workers earning $ 50,000 and $ 33,000 a year at age 30, and then modestly more as their careers progress would actually lose money if they put it into RRSPs, as opposed to investing money that has already been taxed and won’t be taxed further when the funds are eventually withdrawn.
The study itemizes several other drawbacks of the new PRPPs compared to the Canada Pension Plan or the definedbenefit plans enjoyed by most public sector workers and a minority — fewer than one in six — of those employed in the private sector. They include:
• The accumulated savings cannot be paid out as a stable pension, so workers can’t plan for or count on predictable benefits in retirement;
• There’s no provision for disability benefits;
• No further benefits can be accrued during a period of disability;
• Participation is voluntary, meaning some workers will end their careers with little or no coverage and potential economies of scale are lessened;
• Investment losses do not generate new contribution room, and contribution room is too limited to meet the needs of many workers.
One simple fix the authors propose is to allow the PRPPs to include tax- prepaid contributions, like those allowed for Tax- Free Savings Accounts, that would not incur tax liabilities or entitlement clawbacks in a contributor’s old age.
Another would be to allow contributors to set their own pension targets, and allow the plans to pay stable, predictable pensions. This, they point out, is particularly important because many lower- income workers don’t have sophisticated money- management skills. So they also advocate requiring PRPP administrators to screen and educate plan members in the best choices of investment to protect their capital and meet their needs.
In the absence of significant rule changes, they say, PRPP members will not be able to accumulate even half as much pension income as a federal government worker. And many late- career workers, immigrants, professionals and small business owners will not be able to save enough to finance their retirements.