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Ottawa decides that pensions ain’t broke…

Ottawa decides that pensions ain’t broke…

Governments love the idea of the grand gesture. When it comes to big problems, like the looming pension crisis in most OECD countries, the natural temptation for a minister is to come up with a huge initiative, which causes major disruption in the policy area, confident in the knowledge that he or she will no longer be in charge by the time the results come through.

So it makes a pleasant change to see Canada’s Minister of Finance, Jim Flaherty taking a more sensible view of the pension issue. Given the fact that the Ottawa Government is basking in compliments from all sides on its handling of the economic crisis and the fact that it is widely regarded as having one of the best pension systems in the world, it is good to see that they are moving counter-cyclically to restrain pension spending at a time when they could afford to let it drift. They are attempting to do this by making relatively minor changes to the framework that is already in place.

Canada sorted out its Canadian Pension Plan (CPP) in the nineties and now it is fully funded. This ensures a solid return from those who have saved within it via the earnings-related deduction scheme. Now they have moved to get the costs of the Old Age Security (OAS) programme under control with a view to ensuring its long-term viability.

The OAS starting point is being moved to 67 from 65 in states, starting in 2023 and finishing in 2029, in order to reduce the future liabilities on taxpayers well before those liabilities become a serious budget issue. This is vital for Canada as the OAS is the largest federal spending programme.

By taking a proactive approach, the minister is ensuring that the safety net of OAS and its Guaranteed Income Supplement (GIS) counterpart, which provides additional income for low-income seniors, will be sustainable into the future.

In parallel, the recent introduction of Pooled Retirement Pension Plans (PRPPs) has made it easier for those who are normally excluded from the Registered Retirement Savings Plans (RRSPs) plans to access low-cost pension savings vehicles.

Canada has taken a reasonably minimalist approach to pension reform, taking account of the existing pension savings infrastructure and moving to improve its long-term viability rather than by radical restructuring or creating new government entities or major regulatory reform.

This is the smarter approach. Canada is widely regarded as having one of the best pension infrastructures in the western world. Minor tweaking to improve affordability and encourage more saving is surely a better bet than foisting new unproven programmes upon the population. Ottawa deserves great praise for resisting the temptation of the grand gesture and going for a restrained approach to improve what’s already working. This obeys the golden rule that so many politicians find it impossible to keep: if it ain’t broke, don’t fix it.

Tom Murray

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