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Canada needs a new approach to pension plans

The average Canadian without a workplace pension plan has only $3,000 saved for retirement (Getty)
The average Canadian without a workplace pension plan has only $3,000 saved for retirement (Getty)

Workplace pension plans, especially ones with defined benefits, are becoming increasingly rare, leaving a generation of Canadians without sufficient savings for retirement.

“Workplace pension plans are a key element to retirement income security due to features like automatic savings, employer contributions, substantial fee reductions via economies of scale, potentially higher risk-adjusted investment returns, and possible pooling of longevity and other risks,” said Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at Ryerson University’s National Institute on Ageing (NIA).

The NIA says low and middle-income earners need better ways to save for retirement. It’s calling for a new way to ensure financial security for seniors called Tax-Free Pension Plans (TPPs)

It would work like a regular tax-free savings account (TFSA). When money is withdrawn from the account, there are no taxes to be paid.

MacDonald, says her plan differs from the current workplace Registered Pension Plan (RPP) and RRSPs because those accounts result in taxes owed upon withdrawal. That includes money you contributed as well as whatever your employer chipped in.

They can also cause other benefits, like OAS and GIS, to be clawed back if you’re nest egg grows large enough. So, the tax treatment of these accounts can actually discourage saving. NIA says its plan solves that problem.

“TFSAs have been very popular for personal savings, and the same option could be provided to workplace pension plans. It would open the pension plan world to many more Canadians, particularly those at risk of becoming Canada’s more financially vulnerable seniors in the future.”

(The National Institute on Ageing)
(The National Institute on Ageing)

The report found Canadians without any kind of workplace pension only have $3,000 on average in retirement savings. More than three-quarters of workers in the private sector are not covered by workplace retirement plans.

“There has been a steep shift from defined benefit to defined contribution pension plans, and too many Canadians remain uncovered by any pension plan at all,” said Michael Nicin, Executive Director of the NIA.

“Canada’s modest income earners are the least likely to belong to any plan, despite being the most vulnerable to financial insecurity in older age. TFPPs could be an attractive way to get more Canadians into pension plans.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains

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