Proceedings of the Standing Senate Committee on
National Finance
Issue 16 - Evidence - Meeting of November 4, 2009
OTTAWA, Wednesday, November 4, 2009
The Standing Senate Committee on National Finance met this day at 7:08 p.m. to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2010 (topic: pensions).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call to order the meeting of the Standing Senate Committee on National Finance.
This evening we are continuing our preliminary consideration of pensions. We welcome Edward Whitehouse, Head of Pension Policy Analysis, Social Policy Division, Organisation for Economic Co-operation and Development.
Mr. Whitehouse, we appreciate your coming to Ottawa. We know you are based in Paris, and it is much appreciated that you found time to visit the Senate of Canada. Our committee is dealing with the issue of pensions in general. We are still in the early stages of deciding what we might do and how we can complement other work that is ongoing across Canada.
Welcome. Following your presentation, we will have questions for you.
Edward Whitehouse, Head of Pension Policy Analysis, Social Policy Division, Organisation for Economic Co- operation and Development: Thank you very much for your kind invitation.
I will give some background on how the discussion of pension reform seems to be going in Canada. The Department of Finance has convened a committee of the federal, provincial and territorial finance ministers, the Retirement Research Working Group, which has already had a preliminary meeting. Next week, I will be talking to that group on a conference call. There will then be a meeting on December 15 in Whitehorse where that group will discuss the preliminary findings.
The research they have so far commissioned has two strands. I have not met Professor Jack Mintz, but he is a very distinguished professor and I have read much of his work. He has done much research in the area of public finance and he is leading the Canadian experts. Five papers have been commissioned as part of that. An experts' day was held on October 27 to review those initial findings.
My contribution to this is to give an international perspective on Canada's retirement income provisions. I will try to put them into an international context and see whether there are lessons to be learned from pension systems and the pension reform processes that have gone on in other countries.
We always face a great problem, which is that pension systems everywhere are always incredibly complicated. Sometimes, transferring these policy lessons and messages across countries can be difficult. We at the OECD have put a lot of effort into developing a consistent framework to be able to compare pension systems across countries.
I would like to share with you the preliminary findings of my research, which I presented here in Ottawa in September to the Department of Finance and to Human Resources and Skills Development Canada. I am currently writing that up as a report and I hope it will be published later this year, certainly in time for the December meeting of the federal, provincial and territorial finance ministers.
When we look at pension systems at the OECD, we see that they have many different objectives. As a pensions expert, the question I always most dread is ``which country has the best pension system?'' The answer is that it is very difficult to say because there are very many dimensions in which you can measure degrees of performance.
To make things complicated, I will talk about six key objectives, key principles, that we at OECD think all well designed pension systems share. These are very similar to the principles that the World Bank has set out. I spend one quarter of my time working for the World Bank in addition to the OECD.
The first of these six principles is coverage: the membership of pension schemes, both public and private, mandatory and voluntary. We are interested, for example, in the issue of whether people with interrupted careers are adequately covered by the pension system.
The second principle is on the adequacy of retirement benefits: does the pension system currently deliver and will it in future deliver people an adequate income in old age.
The third criterion is financial sustainability. We want a pension system that will be affordable in the long term, particularly when faced with the pressures that just about all countries in the world face from demographic aging, from the population growing older because we are having fewer babies and we are living longer.
The fourth principle is economic efficiency. We would like a pension system that distorts the economic choices and behaviour of individuals as little as possible. In particular, we can have pension systems that can encourage people to retire early. We can have pension systems which discourage people from making voluntary private pension savings or saving in other ways.
The fifth is administrative efficiency. We would like the costs of the system and particularly the charges for private pensions to be kept as low as possible.
The final principle is security of pension benefits in the face of different risks and uncertainties. Pensions are a long- term contract. Between making your first contribution and drawing your last benefit there could be 60 years or more. Many things will change over that time, so we would like a pension system that is robust in the face of these different sources of risk and uncertainty.
I would like to go through those six areas and see how Canada compares with other comparable countries. I will focus on the 30 member countries of the OECD, but in particular on countries with pension systems more comparable to Canada's than others that have taken a very different approach.
To begin with coverage, Canada performs pretty well in terms of the public scheme, in that the basic pension, the Old Age Security, and the means-tested pension, the Guaranteed Income Supplement, are essentially universally available benefits. They depend only on residency in Canada and on the income of the individual, so those are very effective.
Ireland and Japan also have basic pensions. There the benefits are contributory, which is significantly different from having a benefit that is purely based on residency for people who spend time out of the labour market caring for children or relatives, for example. There is some protection for interrupted careers within the Canada Pension Plan and Quebec Pension Plan, in addition.
Also in coverage, it is important to look at the coverage of private pensions, given what a significant role they play in providing retirement incomes in Canada. Indeed, our figures show that in Canada private pensions and other forms of private savings account for around half of people's old age incomes, and that is the highest figure of all 30 OECD countries. Countries such as the United Kingdom, the United States, the Netherlands and Australia are about 40 per cent, but Canada is the highest at 50 per cent. Therefore, it is important for many people that they have access to a private pension and contribute to it.
The overall coverage figures for Canada are that 34 per cent of people have an occupational pension plan, an RPP in Canadian terminology. About 36 per cent have a personal plan, an RRSP. There is some double counting; some people have both, so the overall coverage rate is about 53 per cent of the working age population.
If we look at the occupational component of that, the RPPs, the coverage in Canada is rather less than in comparable countries. In Ireland, Japan, the United Kingdom and the United States, for example, the coverage is around 40 to 50 per cent of the work force. In Canada, there has been a small decline in the coverage of RPPs over the last decade or so. In Germany, coverage of occupational plans is around 64 per cent of the work force, so other countries are doing rather better on this.
It is worth noting that many countries have mandatory private pensions. Of the major OECD economies, Australia, Sweden and Switzerland have compulsory private pensions. Some countries, such as Denmark, the Netherlands and Sweden, have schemes that are quasi-mandatory in the sense that through industrial relations agreements they achieve near universal coverage of the work force. Coverage in the countries that I mentioned is 80 or 90 per cent through industrial relations agreements. Canada, like many other countries, will not be able to replicate the industrial relations structure of countries like Denmark or the Netherlands.
If we look at the details of the pattern of coverage, we find that the situation in Canada is very similar to those of Ireland, the U.K. and the U.S. For example, if we look at coverage by age, only around 20 to 30 per cent of people in their early twenties are covered, reaching a peak of around 65 to 70 per cent of 45- to 55-year-olds, and declining slightly after that point.
Germany stands out in contrast here. There, 55 per cent of 20- to 25-year-olds have a private pension. Germany is doing something right in persuading young people to think about their old age.
If we look at the pattern by earnings, again Canada is similar to the U.K., the U.S. and Ireland, although coverage of the lowest quintile, of the poorest 20 per cent of the population, is around 10 per cent in Canada and 20 per cent in the U.K. and the U.S.
If you look at the richest fifth of the population, the coverage in Canada and the other countries is around 80 to 90 per cent.
Again Germany seems to be doing something different. Forty-five per cent of their poorest 20 per cent of the work force are contributing to a private pension. They are not contributing very large amounts, but they are contributing to it.
There are different patterns on coverage.
The second criterion is the question of adequacy. I note here that the title of the working group is the Research Working Group on Retirement Income Adequacy, so this is clearly one of the most important goals there.
The problem is how to define ``adequacy.'' People can come up with various definitions. Personally, I would contrast two definitions. One would say that adequacy is achieving a basic minimum living standard, and another rather broader definition is adequacy compared with your income when you were working. I will look at both of those briefly.
Using the income measure, we compare the incomes of all the over-65s in Canada with the population as a whole, making various technical adjustments such as for differing household sizes.
We take off taxes and contributions and so on, and we come up with a figure where the over 65s' incomes in Canada are 91 per cent, on average, of the incomes of the population as whole. That is significantly better than the average for the 30 OECD countries, which is about 82.5 per cent. Canada is a very similar level to Germany, but it is well above the performance of Australia, New Zealand and Ireland, where pensioner incomes are 70 per cent of the population average and the U.K. where it is 73 per cent. Canada's 91 per cent looks good on that measure.
Even better is if we look at the issue of old age poverty. The OECD has a standard benchmark for measuring poverty rates. Canada has the fifth lowest poverty rate of seniors in the 30 OECD member countries, at around 4.5 per cent, compared with the OECD average of 13.3 per cent. In Ireland, old age poverty is above 30 per cent, and in Australia and the United States it is around 25 per cent, and in Japan it is above 20 per cent. Canada is performing very well on that measure.
Those measures of incomes and poverty are, in pensions terms, essentially backward looking. We are looking at the performance of the pension system as it was in the past because we are looking at today's retirees. Their incomes in retirement will depend on what happened in the economy in the past and how the pension system has been in the past.
Pension systems everywhere have been changing rather a lot, so at the OECD, we also look forward and try to calculate the pension entitlement of a worker entering the labour market today if the rules and parameters of the pension system remain the same into the future.
We calculate the replacement rate, that is, the pension relative to an individual's earnings, for an average earner in Canada is about 45 per cent. That is a mix of CPP, QPP, OAS and GIS comes to 45 per cent. That is a lot below the OECD average, which is 59 per cent, but it is higher that many of the other major OECD countries. It is higher than in Australia, Germany, Ireland, Japan, New Zealand, the United Kingdom and the United States. The public pension in Canada is bigger than in many other OECD countries, but less than the OECD average. In many of the continental European countries, public pensions are very much larger. This underlines the importance in Canada and those other countries that I mentioned, such as Germany, Japan, the United Kingdom and the United States, of people having private pensions and contributing to voluntary private pensions in those countries.
I will turn now to issue three: financial sustainability. Public pension spending in Canada is among the lowest in the OECD. It is the sixth lowest of the 30 countries, at around 4 per cent of GDP, where the OECD average is 7.2 per cent of GDP. It is significantly lower in Canada. In some countries it is hugely higher than Canada. Italy, for example, spends 14 per cent of GDP on pensions, France around 12.5 per cent and Germany a little bit over 10 per cent of GDP. Many countries are spending a lot more.
Last time I was here, I had the pleasure of spending a bit of time with the actuaries in the Office of the Superintendent of Financial Institution. They do the long-term financial projections for CPP and also for OAS and GIS. Looking at their numbers, the Canadian pension system looks eminently sustainable out to a long forecast to 2075 or something like that. With the current contribution rate of just below 10 per cent, with the reserve fund currently in place, the pension system is long-term financially sustainable.
Canada currently has slightly more favourable demographics than the OECD countries. There are 4.7 workers per pensioner in Canada and 4.2 workers on average in the OECD. In poor old Japan, which as of around 2000 has been the oldest OECD country, there are only 2.8 workers per pensioner. If we put the projections out into the long-term, by 2050, we expect Canada to have 2.1 workers per pensioner, and the OECD average is 1.9. Japan will be in a situation of 1.2 workers per pensioner, which clearly is the most severe demographic challenge faced by any OECD country, or any country in the world. Nonetheless, Canada is expected to continue having immigration and is not facing the same sustainability pressures as other countries.
Turning now to the question of economic efficiency, I have heard that there is legislation currently before the House of Commons to make some adjustments to the Canada Pension Plan to encourage people to work longer, which will take the form of a larger reduction in benefits for people who take early retirement, and also more flexible arrangements for people to be able to combine working with drawing a pension between the ages of 60 and 65.
Looking at the current situation in Canada in terms of effective ages at which people withdraw from the labour market, Canada is right in the middle of the OECD countries. Men leave the labour market on average around 63.5, and women a bit below 62, which is near the OECD average. It is certainly significantly earlier retirement than you would see in New Zealand, Switzerland, the United States or the Nordic countries. As you would expect, it is rather later retirement than in many of the continental European countries, such as Germany, France and Italy.
Many other OECD countries have started to increase pension ages. It is interesting to observe that between 1950 and 1993, the average OECD pension age fell from 64 to about 62.5. In Canada the pension age was coming down from 70 to 65 over that period. There was also a decline in pension ages for women.
Over that period, not only were pension ages coming down, but people were also living longer. In 1960, the average expected length of retirement for men was 11.5 years, and for women about 16 years. That increased for men to 17 years by the early 2000s. You are seeing two effects, earlier retirement and people living longer.
Many OECD countries have put in place increases in pension age in the future, and Canada may wish to consider this. Australia has recently announced a decision to take pension age from 65 to 67; the U.K., never to be outdone, will go from 65 to 68; and Germany will go from 65 to 67. The U.S. has long had in place a move to 67 which will be fully in place in about five years time.
We are seeing a lot of OECD countries putting increases in pension age. We have done all the calculations and shown that for those countries that are increasing pension age, it still means that the average duration of retirement for men will continue to grow. We are running to a standstill in the sense that we will not see a reduction in the duration of retirement and it will continue to increase slightly.
On administrative efficiency, I have crunched the numbers for the administrative expenses of Canada's pension system. I only have numbers for nine OECD countries. Canada's is 70 per cent less than the average of the nine countries. It is a tight administration. For example, Australia spends seven times more on administration; Spain spends 12 times more on administration.
The only country which is significantly lower than Canada is New Zealand. The low administrative costs are because New Zealand only has a basic pension which is a flat-rate benefit payable to everyone age 65 and over. They do not have the expense of running a means-tested scheme. That explains why Australia has much higher administrative expenses.
Canada's is an efficiently run public scheme, but there is a problem. I have been talking to a lot of people about the administrative charges for private pensions — that is, for RRSPs. I do not have exact numbers, but the numbers that have been indicated to me are that something like 2 per cent of assets per year is typical of the charge for an RRSP. That is very high. Sweden manages to run the system with less than 0.5 per cent. The United Kingdom, which is introducing its new personal accounts scheme in 2012, expects to run at 0.5 per cent at the time of introduction, falling to 0.3 per cent in the medium-term. Chile is running at 0.75 per cent. The only countries that are as high as Canada are Hungary and Mexico, at around 2 per cent of assets per year.
People often misunderstand the scale of the impact these charges have on people's pension benefits. One per cent just does not sound like a big number. However, 1 per cent of assets per year over the duration of a pension contract means that 20 per cent of your contributions are going into the pockets of the provider. Furthermore, 2 per cent a year means 40 per cent of your contributions are going to the provider. If you think about the scale of the financial crisis and its impact on private pensions, the financial crisis had the effect of having a 1 per cent charge on pensions over the lifetime of a contract. These are huge numbers and they need to be addressed.
I have gone on longer than I intended. I thank you all for continuing to listen. I will draw out some concluding remarks now on where I think the significant issues are for Canada.
Perhaps there is an issue around the coverage of private pensions, that there may be a gap, particularly for younger workers and for low- to middle-income earners, in terms of private pension coverage. Countries have been adopting various policies to deal with this issue. There is certainly a lot of interest in trying to readjust things like the tax incentives to encourage coverage, moving away from tax reliefs and towards something like a matching government contribution to schemes. There is also the experiment in New Zealand of the kiwi saver scheme of automatic enrolment, where people are put into a private pension unless they sign a form to say that they want to opt out of it. That is also the policy that the U.K. will be adopting from 2012 with the new personal accounts program.
The adequacy of public benefits going forward is potentially an issue in that there has now been a long period of price indexation of the value of the Old Age Security and the Guaranteed Income Supplement. Over time, that could mean that they wither away relative to average living standards in the economy. Real wages in Canada have not grown rapidly over the last decade, so they have not fallen that much far behind wages. However, some thought needs to be given towards linking those benefit levels to wages in the future to ensure that the good levels of adequacy that are shown today continue.
As mentioned, I think revisiting the issue of pension age should be on the agenda., as should the question of administrative charges for private pensions. Finally — and this has come out with the financial and economic crisis — there is the question of the way private pensions are invested. In Australia, the United Kingdom and the United States, many people in that run-up period to retirement still had much of their private pension money invested in risky assets and, therefore, saw substantial losses. Somehow, we need to guide people towards a life cycle investment strategy where people automatically move to less risky assets as retirement nears.
Those, I hope, are some points to raise some questions from you. I look forward to hearing from you and to answering your questions as best I can.
The Chair: Mr. Whitehouse, thank you very much. You touched on a lot of interesting points. I have a list of senators who would like to enter into a dialogue with you. I will start with a senator from Toronto, Senator Eggleton.
Senator Eggleton: Thank you very much for being here. We now have a great opportunity to ask you some questions, given the depth of information you have on this subject. My goodness, you overwhelmed us with a lot of statistical information.
Statistics have been floating around in this country. For example, Statistics Canada says that the median amount in RRSPs for those taxpayers nearing retirement is about $60,000. That is only enough to buy an annuity of approximately $3,000 a year. It has also been estimated in another study that five million Canadians, about a third of the workforce, are not building enough of a private nest egg. That sort of corroborates the other statistic.
When it comes to the average gross income replacement, you said that the OECD averages about 59 per cent and we are at about 45 per cent, if I got those correctly.
Mr. Whitehouse: Yes.
Senator Eggleton: You did not say that we were the lowest. Others were lower, but we seem to be quite a bit below the average.
Could you comment on what in these other countries brings them up to 59 per cent or beyond? Are they mainly mandatory plans? What kind of plans are they? Are they defined benefit plans?
The amount of income involved here, namely 45 per cent, may not be the lowest, but it will be a big reduction for a lot of people when they finally reach there. A lot of people do not seem to realize that they do not have as much as they thought they should have or they are not sure how much they should have when they retire. I wonder how this relates to what is happening in terms of that OECD average.
Mr. Whitehouse: To start with, perhaps I should not have given you those numbers. Those are gross replacement rates. Once you take taxes into account, then it will add a bit to the average. The OECD average would be about 70 per cent rather than 60 per cent.
Canada is by no means the lowest. The lowest is the U.K. which is about 32 per cent. Canada is way off there.
Senator Eggleton: Where should it be? Where would a reasonable percentage be from all the information you have gathered?
Mr. Whitehouse: As far as I understand the deliberations of the research working group experts day, they spent a lot of time discussing this and came to no conclusion. It is quite complex. First, you have to think about family structures. Second, the replacement rate for someone with low earnings is probably 100 per cent and does not need to be as high for someone with higher earnings. Third, as I have already mentioned, you need to take taxes, and so on, into account.
One method that was adopted in the U.K. when the independent pension reform commission chaired by Lord Turner looked at this, was to ask people. They managed to phrase the question so that it was not: ``How much money would you like in retirement?'' to which everyone would answer: ``as much as possible.'' They asked: ``How much money in retirement would you like on the condition that you somehow have to pay for it?'' They found exactly this pattern, that low-income people would say, ``I want the same as I have now;'' and high-income would say, ``I want less than half of what I have now.''
One important thing to bear in mind is the way housing markets work in different countries. If someone is renting a house throughout their working life, they probably need a higher replacement rate in retirement than someone who has bought their house and paid off their mortgage when they go into retirement. It is hard to come up with the right number.
Senator Eggleton: One of the things that set off a lot of concern here is when bankruptcy comes into play for companies that have had defined benefit plans that people have relied upon for some period of time. The biggest example of that is Nortel, a company that has operated also in the U.K. and the United States. A lot of people are being very much hurt by that. One of their concerns is that their claim is not given a high enough importance in a bankruptcy situation. As a result, they have to sit down with other creditors and are certainly not the highest priority. Their whole pension plan is very much in jeopardy and they will get substantially less.
Are there any other experiences in the OECD on that? Do you have any suggestions on how that kind of situation would be dealt with?
Mr. Whitehouse: I am certainly not an expert on bankruptcy law and so I would not know how other countries treat the pension fund in terms of the hierarchy of creditors. Presumably it is the tax man first, bondholders second and the pension fund is slightly lower down.
One issue that this raises is having some sort of guarantee fund. The United States established its Pension Benefit Guaranty Corporation, PBGC, in the 1970s after a famous bankruptcy. I cannot remember quite which company it was, but it had the same problem. The company went bust, the pension fund was vastly underfunded, and they established the PBGC.
There are some very worrying things about how the PBGC is operated. It really has been underfinanced. It does not offer a huge amount of security. I imagine, for example, some of the Nortel workers in the U.S. will be covered by PBGC, but they will notice that they get nothing anywhere near 100 per cent of their promised benefits out of that program.
The U.K. established a pension protection fund a few years ago with similar aims, which tried to learn the lessons from the PBGC. In particular, it risk rates the premiums that companies must pay to have their schemes covered. Ireland is a country that has a lot of defined benefit schemes and does not have one of these sorts of schemes and there have been a lot of calls there for establishing them.
I am very cautious about the value of these things. The moral hazard problem is that the schemes can quickly build up very large deficits and someone has to step in, and it is usually the federal government that has to step in to fill up the holes. As sympathetic as I am to the plight of Nortel workers, it is very difficult to know what type of system could be put in place to protect people in those sorts of circumstances.
In general, though, Canada has been a little bit slower in seeing a move towards defined contribution schemes. As far as I can observe from the statistics, companies have actually tended to stop providing pensions.
Senator Eggleton: More in the private sector.
Mr. Whitehouse: Yes. In the private sector they have done this rather than doing as they have done in the U.K. and the U.S. and establishing defined contribution schemes. If the choice is between nothing and the defined benefit scheme, I think the move towards defined contribution would make some sense. This move has been very rapid in the U.K. recently. During this crisis, for example, some very big companies such as Barclays Bank and BP that had already closed their defined benefit plans to new members, closed them to existing members as well, so their accruals were all frozen. The move has become very much more rapid, and it would seem in Canada that a move of that sort would make some sense.
Senator Mitchell: Thank you very much. Your grasp of all of these figures and differences is very interesting. My questions will be quite technical to clarify some things.
When you said 34 per cent of Canadians have an RPP, RPP would include both defined benefit and defined contribution pensions; is that right?
Mr. Whitehouse: Yes, I think so.
Senator Mitchell: When you say 36 per cent have RRSPs, they are clearly RRSPs. Of the 34 per cent, those who have the defined contribution essentially just have an RRSP? Defined contribution is not much more than an RRSP that your employer helps you fund.
Mr. Whitehouse: Yes.
Senator Mitchell: Would you happen to know therefore what percentage of Canadians has nothing but a defined benefit?
Mr. Whitehouse: Not off the top of my head. The numbers I am quoting to you were given to me by StatsCan.
Senator Mitchell: We can get that easily enough.
Of the 34 per cent of Canadians who have RPPs, would you know offhand what percentage of those are government pensions versus corporate pensions?
Mr. Whitehouse: I am afraid I do not know that.
Senator Mitchell: I do not mean to put you on the spot. We will find that out.
You did say that 4 per cent of GDP in Canada goes to public pensions, I think, or government pensions, compared to 14 per cent in Italy?
Mr. Whitehouse: Yes.
Senator Mitchell: Would those be CPP and QPP, and would they include public service pensions as well?
Mr. Whitehouse: Certainly CPP, QPP, OAS, GIS and I think it should include schemes for public sector workers as well.
Senator Mitchell: You talked about the 2 per cent administration fee or the processing fee in Canada's case being quite high. Is that a management fee on the assets, for example, a 2 per cent fee on the management of a mutual fund, or is that the actual fee that the pension administrator charges?
Mr. Whitehouse: This is a number that is being given to me by various officials and I do not know that there is an exact source where the data was actually collected. I have checked all of our OECD studies of management fees and Canada does not appear in any of them. That is a speculative number, but one which many people have agreed is the sort of norm. I think that would include the management of the funds. It would be an all-inclusive administrative charge.
Senator Mitchell: Like a management fee.
Mr. Whitehouse: The management to deal with the collections and the record keeping and the fund management.
Senator Mitchell: Would that be pensions, not RRSPs generally?
Mr. Whitehouse: No, that is for an RRSP. As I say, that is a highly speculative number which I have been told, but many people have told me that that is approximately the right number.
Senator Mitchell: Then it must be the management fee for the mutual fund, because you pay $120 a year for an admin fee for your actual RRSP. We have to look at it because it is big.
Finally, one of the questions that many people have is, what has happened to the investments in their pensions. I am referring to their defined benefit. That will be somewhat muted because they think that they will get it guaranteed by the funds of the corporation and the government, and perhaps they will. In a defined contribution pension plan or a group pension plan or a group RRSP, it is a big issue. We had, for example, a witness here who said pensions should be limited in their investments to nothing but bonds. There are problems with that because bonds go up and down too.
Recently, the market has been falling so dramatically and people confront you with that kind of problem, asking what can we invest in to make it work and be sure we are guaranteed. When you look at this problem, is there anything you have come up with that is actually an improvement on what is being done? Have you come across that?
Mr. Whitehouse: The thing we have been researching most is this issue of life cycle investments, moving people towards bonds as they get older. If you are in your 20s, then you can put the whole lot in equities. As you move towards retirement, you will want to be shifting towards bonds.
For example, in the U.S. the 401K is the major defined contribution occupational plan in that country. Something like three quarters of 401Ks offer a life cycle investment of some particular form. Only a quarter of people who have that choice actually choose to put any of their money into the fund, and if they do, they often do not put very much. Overall, life cycle funds account for 9 per cent of the overall investments of 401Ks.
If you look at how people's money is invested, something like 45 per cent of people in their early 60s have more than 70 per cent of their 401K in equities. This is a very risky way of investing your money. About 25 per cent have more than 90 per cent of their money in equities. We would very much like to see more of a life cycle investment.
The main funds in the U.S. are called target date funds. You say you want to retire in 2015 or 2025, for example, and in theory you are supposed to move to less risky assets as you near retirement. The average is something like 85 per cent equities for people in their 20s and 30s, which is quite reasonable. It is still about 55 per cent in equities for people in their 50s and 60s. They are not doing much life cycling; there is not a huge amount changing there. There are many concerns with those.
In Australia and the U.S., people just do not buy annuities. Therefore, you have people leaving their money in the account and drawing regular amounts out of the accounts. You have people actually in their 70s and 80s who are still massively invested in equities. Something needs to be done about that.
Senator Mitchell: One of the reasons people tend not to go more to bonds as they get older, is that by the time they are 50, they have perhaps not saved enough. They think they have to take the bigger risk because 2 or 3 per cent on bonds will not get them to where they need to be for the age of 65. When I am 65 and I have not saved enough but I want to retire, 2 or 3 per cent will not get me enough to live on. When bond rates are so low, it really squeezes people into a higher risk, and hopefully higher return on investment, which has not been so high a return lately. That is one of the problems.
Mr. Whitehouse: I fully agree with you.
Senator Mitchell: Great. Thank you.
Senator Ringuette: I will start where my colleague started as well. The 2 per cent administration charges that you quoted in Canada, which is the highest of the OECD countries, is not a surprise to me because Canadians are being overcharged with other financial products as well.
How do the other countries you mentioned, that have 0.3 per cent administration charge and, at the most, 1 per cent, how do they do it? How do they ensure that administration charges from financial institutions are not more than that? Is there a legislated cap?
Mr. Whitehouse: Countries have taken very different approaches. At the first stage, one is to make charges more visible and more easily comparable. In my early work in the U.K., there were about eight different kinds of charges that companies would levy. Some would be one-off fees, some would be annual fixed rate fees, some would be a percentage of assets and some would be a percentage of contributions. Therefore, working out which was the cheaper plan was very hard. You had to make a lot of assumptions about how much you would contribute, for how long and what the investment return would be before you could come up with an answer.
One thing to do to make it simple and make it visible, is to say you can charge however much you like, but you can only charge one kind of fee. Usually that will be either charging a percentage of assets or a percentage of the contributions. Everyone must have one comparable price. Then I think you need to have some sort of financial literacy program in order to explain the numbers that I mentioned earlier. That is to say that one per cent extra charge equals twenty cents of every dollar you are paying into your pension. So that is disappearing straight out in terms of charges.
Countries have gone further when that process of having something that is visible and comparable has not worked. In the U.K. in the late 1990s, there was introduced something called a stakeholder pension, which is essentially like an RRSP. It is a defined contribution pension plan, but they put a ceiling on the charges at 1 per cent of assets per year. The financial services industry screamed that this would be absolutely impossible but, noticeably, somewhere between about 30 and 50 companies entered the market. On my stakeholder pension, I was charged 0.5 per cent of assets per year, for example. There are plenty of people out there who can run these things for a reasonable price. You have to invest the money in index funds or exchange-traded funds, but it is possible.
The next level of approach, to take it one step further, is some sort of centralized clearing house system. In Sweden, for example, they were very worried about the charges because their compulsory private pension contribution rates were only 2.5 per cent of people's earnings. You can imagine that the charges could make that all disappear very quickly.
They established a centralized clearing house that would collect in all the contributions. People could still have very wide investment choice — I think they had 500 funds they could choose from — but the recordkeeping agency would simply send one cheque to each provider for all of the people who had chosen it. The records were all kept centrally. That reduced costs in two ways. First, they negotiated much lower fees than each of the providers were offering to a retail investor. Second, they avoided a lot of marketing expenses because the funds did not know which individuals were members of their scheme. Many direct marketing opportunities were forestalled by that.
In the U.K., we very much follow the Swedish model of trying to have a centralized clearing house and guiding people towards, in the main, low-cost index funds or exchange-rated index funds, to keep those charges very low.
Senator Ringuette: The mandatory private pension is foreign to us. Could you elaborate a little more on how it is legislated and how it works?
Mr. Whitehouse: It works in different ways in different countries. If you take, for example, the Eastern European countries, they had what in the American policy is called a carve-out. They said we will cut back the public pension and divert some of the contributions into compulsory private pensions.
The general frame of this — I will use Poland as an example — is that everyone under the age of 30 had to join the new system where around half of the benefits you would expect to come from the private pension and half from the public. People between the ages of 30 and 50 could choose to remain all in the public or switch. I think about 25 companies entered the Polish market initially. There has been some consolidation and it is reduced now, but you had a choice among the providers. If you did not make a choice, you were defaulted into one of the providers.
The other way in which this has been introduced has been a sort of add-on private pension. This would probably be more relevant to the Canadian case.
Let us take Australia as an example. Before the Australian reform, which was in 1992, around half of the work force had an occupational pension scheme. They had a similar starting point to where Canada is now. The Australian government made it compulsory for all employers to contribute a certain proportion of their employees' earnings to a private pension. That increased over time to 9 per cent of individual earnings. Every employer must have one of these schemes.
Initially the individual had no choice; they just had to be with whatever their employer chose. Many employers already had their own schemes, so their own schemes covered that. The smaller and medium-sized enterprises in the private sector that did not have these schemes mainly went to a provider — an insurance company or a bank — and set one up for their employees.
Norway and Switzerland again will be examples where your starting point was quite a high coverage of occupational schemes and it was simply made mandatory for the whole population.
Senator Ringuette: Will your publication in early December cover all of these in more detail?
Mr. Whitehouse: For the moment, I think we are still in diagnosis mode rather than treatment or prescription mode or whatever might come next. Certainly at some point we will.
Our big pensions report called Pensions at a Glance came out in June of this year. I would be happy to send you electronic copies to look at. That covers all of these sorts of areas in very great detail.
``At a glance'' is OECD terminology. It is 279 pages long. This is why Time Magazine called it ``charmingly titled'' Pensions at a Glance. I will be happy to send that to you.
The Chair: If you could, Mr. Whitehouse, and we will see that it is distributed.
As I indicated to you earlier, we are still in a diagnosis mode as well here in this committee. Any background information you can provide us will be helpful.
You talked about the 2 per cent for a private pension administrative fee. Have you done any comparison between the administrative fee costs for private versus public pensions? I am assuming public pension administrative fees would be less than that.
Mr. Whitehouse: They are vastly lower, but the public scheme is not doing as much work. In most cases it is not running investments. Of course in Canada's case, the CPP has a very large reserve. I have not checked what the administrative costs of running that reserve are, but I presume they are significantly lower than 2 per cent of the assets per year. Then again, they do not have to do all the record-keeping. People do not have an individual Canada Pension Plan account in the sense that they own part of the reserve. It is a general reserve against all the liabilities. There is an apples and oranges comparison problem in terms of comparing public and private administrative costs.
The Chair: Correct me if I'm wrong, but I am assuming the size of the fund being administered would be a factor as well.
Mr. Whitehouse: Clearly, yes. That is why the U.K. has said we will go for a 0.5 per cent in the early years as the assets are built up but we are aiming to get it down to 0.3 per cent once the value of the assets has increased.
The Chair: That is why I was surprised that there were so many private funds. I wondered how so many could do it at the 1 per cent of administrative fee. If they combined and did their work together, they could probably achieve that.
Mr. Whitehouse: I think that is the objective behind the approach in the U.K. People will be able to choose whichever provider they want with whichever charges they want. However, people will be guided by various defaults into, in the main, the lower charge life-cycle funds. We know from international experience that people tend to go with the default options.
Sometimes you get an excitement around the time of pension reform and people actively make investment choices. In Sweden for example, at the time of the reform you had this orange book about the size of a telephone directory and people looked through that and made their choices. The unfortunate thing is this was happening around 2002, and people made their choices the way you should not make investment choices; they looked at past performance. They tended to put all of their money in tech stocks, which immediately collapsed.
In fact, the default fund was the best performing fund in the first few years of the operation. As a result, 85 per cent of people in Sweden now are with the default. We had similar things in Chile: When investment choice was first offered, two thirds of people made an active choice. Now it is very few.
Defaults are a good way of guiding people to where you think they ought to go.
The Chair: The wiser way.
Senator Di Nino: I would like to start by seeing if I can redefine the word ``pension.'' At least in my books, a pension is generally seen as a plan that is, to some degree, managed, controlled and attracts a tax advantage. That is my definition.
I wonder if you are familiar with another asset for retirement that attracts a very interesting tax advantage as well, which I think should be included in the definition of the assets available for one to live on in retirement.
We have a system in Canada — and I wonder if you know of this anywhere else — where your principal residence throughout your lifetime does not attract capital gains tax. If you bought a house at 30 years of age at $200,000 and when you are 60 you want to retire and it is worth $1 million, that $800,000 does not carry tax at all.
I spent a little time in this business, so it is part of a discussion I have had many times. That is also in effect an asset which is used for retirement purposes which, when you do your stats, may make those numbers a little different. Does any other country that you know of have similar types of other available investments that would not attract a tax cost and that you could, in effect, build as a retirement asset?
Mr. Whitehouse: Most OECD countries have tax privileges for owner-occupied housing. That is generally found. The rates of owner occupation tend to be a little lower in continental Europe, and they are highest in Australia, U.K., Canada and the U.S.
I fully agree with you that people do save for retirement in many complex ways which do not always have the label pension on them. As Senator Eggleton said earlier, many studies show that people do not have enough pension, but if you sit down and go through their entire finances, you will see they are putting money into their own business or are invested in housing. They have actually made some sort of provision.
Indeed, my former boss in the U.K. was commissioned to do a TV program designed to demonstrate that people were not saving enough for their retirement. The people they wheeled in front of him to discuss this were people who, for example, had bought a bigger house than they needed and planned to trade down to a smaller house when they retired. They were investing in their business. He was not able to demonstrate that these people were not thinking about or preparing for their retirement. They were, but not through things with a ``pension'' label on the outside of them.
Picking up on that in the data analysis is quite difficult in terms of what people have in housing assets and so on. I agree that we should not narrowly think that people can only save for retirement through something with the ``pension'' label on the outside of it.
Senator Di Nino: You talked about public expenditure for pensions and Italy being at 14 per cent. You gave one or two other examples. My understanding is that a number of countries in the EU — particularly, France, Germany, Italy and a couple of others — have recently undertaken pension reform that will lead to a reduction of these public expenditures. Is your 14 per cent in Italy or from the other examples, before or after these reforms?
Mr. Whitehouse: The 14 per cent for Italy is for the last couple of years.
The European Commission has recently issued long-term financial projections for pension spending for all 27 EU member states. These suggest that pension spending in Italy in 2060, which is the end of their forecast horizon, will remain at about 14 per cent of GDP. You have two things occurring. You have a huge aging effect in Italy. The fertility rate in Italy is one of the lowest of OECD countries at about 1.3. It is well below the 2.1 babies per woman that you need for replacement population levels. There have also been substantial cults in benefits.
You also mentioned France and Germany. Our estimates are that the reforms in Germany and France will cut public pensions by approximately 25 per cent. Over the forthcoming forecast horizon to 2060, pension spending in France and Germany will go up but only by a small amount.
There have been huge cuts is pension benefits. About 20 out of 30 OECD countries have had a major pension reform in the last 15 years. About 10 of those involved major cuts in benefits. The numbers illustrated that the norm is around 20-25 per cent cuts in benefits.
Senator Di Nino: Administration charges are an issue this country has been debating for a long time. Management expense ratios, MER, is the term used.
There are those who say: I do not care what I am paying as long as my return investment is such that I get more after the MER than someone else is getting by getting the cheaper rate.
I ask that not to support anyone's position. However, is that not an issue? Is this not most times the choice of the investor, in that he is looking for a net return higher than someone else's regardless of administration costs?
Mr. Whitehouse: I think we would all like something that would pay a higher return as some of your colleagues suggested. The empirical evidence is that no fund managers persistently outperform the indices. The extra management fee is not delivering an extra return.
I did some number crunching for the U.K. I found a very slight increase in performance as management fees increased. It was nowhere near as much as the size of the management fees.
My personal feeling is that it is not possible to outperform the market persistently. You are best to go for the cheapest funds. For my own investments, I carefully pared down to the lowest charge funds and went for index funds. I think most of mine are about 0.3 per cent charges.
Senator Di Nino: I did not articulate my point properly.
From what I understand, this is mostly the choices of individuals. I think you used the word ``visibility'' before. As long as the charge is properly identified and the investor understands what they are doing, it is a choice. This is the point I am trying to make. It is not necessarily that companies are trying to gouge the individual if they declare the costs and one can comparison shop.
Mr. Whitehouse: Clearly, activity managed investments are more expensive if you have a fund manager who will pick stocks and maybe even be an activist investor by intervening in company policy and voting at shareholder meetings, et cetera. That costs money.
However, the general finding from finance literature is that this does not generate extra returns. That is a very general finding.
Senator Di Nino: That was not my point. I agree with that.
It is fairly standard in this country when you are buying into a fund that carries costs and investment choices, that a customer profile is prepared for each customer. The customer has a choice of assets, and the risk levels are all defined and agreed to by the client and the bank or investment house.
Is this common in the studies that you have done?
Mr. Whitehouse: I think in most countries, financial services regulations require that providers properly assess the desires of the customer and, particularly, their appetite for risk. That is clearly the most important item.
You often find that people become extremely conservative. We know from behavioural economics literature that people suffer from myopic loss aversion. They do not like the idea of ever losing any money.
Senator Di Nino: It is all of us, not only them.
Mr. Whitehouse: For example, if I were to offer a bet to all of the people in the room and toss a coin. If it comes up heads, I will give you $120. If it comes up tails, you will give me $100. How many people would take the bet?
Senator Di Nino: I probably would.
Mr. Whitehouse: We have a couple here. The most I got on this offer was from an audience of investment bankers in New York. I got a third of them agreeing to take the bet. The last time I enforced the bet, I lost.
Senator Di Nino: Do you think Canada is rating well generally in this area?
Mr. Whitehouse: I have set out what I think are the issues for Canada. They are much smaller and more manageable than if I was talking to a similar body in many other member countries of the OECD.
Canada has a high performing retirement income system.
[Translation]
Senator Carignan: Mr. Whitehouse, can a retirement plan contain a certain minimum amount in real estate? Are there rules that set a minimum, whether in real estate or in equity, per country where the funds are held? Do rules of that kind exist and are they desirable?
[English]
Mr. Whitehouse: Most countries now are allowing lots of international investment. It is essentially illegal for EU countries to say that you must invest the money domestically. I understand that there was a debate some years ago in Canada about the investment of the CPP/QPP and that there originally had been domestic investment requirements, but that those are being removed.
The general point is that pension funds need to diversify their portfolios as much as possible. Pension funds are to an extent in a unique position because they are long-term investors, so investment not only in property but also in infrastructure and so on, seems to be a sensible part of the portfolio.
I was interested to see that the CPP has bought up a lot of infrastructure investments from Macquarie Bank in Australia. This seems an interesting and sensible investment for the CPP, which has almost an infinite investment horizon. It is not like an individual who wants the pension to last for 50 or 60 years. The CPP will be going forever.
Senator Callbeck: You said that in Germany 55 per cent of 22 to 25-year-olds have a private pension plan. That would obviously be the highest percentage in any of the OECD countries. Is there a reason for that? Have they promoted it?
Mr. Whitehouse: This is certainly worthy of more research, because this is a unique success. During the course of the pension reform process, the German government cut the public pension significantly, by 20 or 25 per cent for today's workers compared with their parents and grandparents. The German government has been open about this and has told people that in the past the public pension system was designed to give a comfortable retirement. They said they could not afford that in the future because their birth rate is too low and their population is about to start declining if it has not already started to do so.
They told people that they need to save for retirement, and very quickly these new pensions, called Riester pensions, after the man who proposed their introduction, have come to cover about two thirds of the workforce. There has been a great response there.
They have, not tax incentives, but matched contributions from the government. If you contribute 4 per cent of your wages, the government will throw quite a lot of money into that. People are not contributing huge amounts, but they are contributing that 4 per cent.
I do not quite understand why, when people in Canada, Ireland and the U.K. are equally aware that they have personal responsibility for providing for their own age, they are less likely to do so. It is worthy of investigation.
Senator Callbeck: I was looking at a chart on the real returns of pension funds for 2008. Germany is minus 8.5 per cent, whereas we are 21 per cent, Australia is 26 per cent, and Ireland is 37 per cent.
Why would Germany's return be so different from that of other countries?
Mr. Whitehouse: It is mainly explained by the fact that the investments are very conservative. In Australia, the U.S. and the U.K., around 60 per cent of pension funds are invested in equities. In Canada, it is lower than that at about 50 per cent. In Ireland, it is higher, at 65 to 70 per cent. You can explain the different returns in part by that.
In Germany, they only invest around one third of their private pensions in equities. It is principally the fact that they have a more conservative investment strategy. Looking at the chart, their investment performance was better than Norway, Switzerland, Portugal and Austria, which have a similar proportion of funds invested in equities, and did not have a such a decline. The main driver is the investment strategy.
Of course, 2008 was a good year to invest in bonds, but if you look at the longer-term horizon, bonds have delivered an investment return of around 5 per cent real over the past 30 years compared with about 8 per cent or 9 per cent real for equities, so there is a substantial difference.
Senator Callbeck: I want to ask about the difference in retirement income of men and women. In Canada, it is lower for women. I imagine that is true for all the countries we are talking about here tonight.
Is there a wider gap here than in other countries, or are the gaps roughly all about the same?
Mr. Whitehouse: There are some countries where women have higher retirement incomes than men on average, but only a couple. Canada is around the middle. The poverty rate for older women is a few percentage points higher than it is for older men. Again, there are more detailed things in the Pensions at a Glance report. I have not done my revision because I will be speaking tomorrow to the House of Commons committee on the status of women, and I will have these numbers at the forefront of my mind then. There is a gap, yes, and Canada is not alone by any means.
Senator Gerstein: Tax assisted savings seem to play a meaningful role in Canada. Witness the millions of Canadians who have RRSPs to save for their retirement. Are you aware of the new savings vehicle that was recently introduced, the tax-free savings account, and have you an opinion on their effectiveness? Are you aware whether other countries are using them?
Mr. Whitehouse: The Tax-Free Savings Account is that it is what we would call a prepaid expenditure tax treatment. That is, the contributions into the scheme are not deductible, but neither the investment returns nor the withdrawals are taxed.
The U.K. has experimented with similar tax treatment of savings since the 1980s. Originally, there was a thing called a personal equity plan which, given its name, could only be invested in equities. There is now the individual savings account where you can invest in cash equities, whatever, up to a set limit. I have worked a lot on tax as well. When I have written about taxation of savings, those sorts of savings vehicles are the ones that I have tended to favour.
Senator Gerstein: You tended to favour those?
Mr. Whitehouse: Yes.
The question that interests academics is this: Do they increase savings? The answer is very mixed. Unfortunately, most of the analysis is done in the U.S. The economists there are divided into two camps. One camp absolutely believes that everything to do with IRAs and 401Ks, and so on in the U.S. is all new saving. The other camp thinks that most of it is saving which is simply diverted from less tax attractive vehicles. I tend to stick with the group that thinks a lot of the saving is not new saving, it is simply diverted saving.
When you have these different instruments like this Tax-Free Savings Account versus an RRSP, the question is whether people can somehow get in the system and move money between them. My understanding is that with RRSPs, you have deductible contributions and no tax on investment returns, but you are taxed on the way out. It is the other way around for the other one.
Senator Gerstein: That is right.
Mr. Whitehouse: If people's incomes are fluctuating over their working lives, as most people's incomes do, then there are points when they will put their money in RRSPs and points when they will put their money in the Tax-Free Savings Account to maximize the tax advantages.
Whether it increases the individual's savings is one question. The second question one is this: Does it increase national saving? Clearly, the government is losing revenues by having these plans there. There may also be some concern that people might divert money which they might have locked away for retirement into a Tax-Free Savings Account simply on the grounds that they can get their money out now and they do not have to wait until later.
Senator Gerstein: In your preamble, you indicated the question you most dread was which country has the best pension plan. However, we can often learn lessons from other countries.
From your perspective, could you suggest a handful of countries that this committee might like to take a look at in terms of what innovative solutions, particularly with regard to pensions and retirements? Who would we want to take a look at?
Mr. Whitehouse: One of the key issues that should emerge from the diagnosis will be a question of compulsion. That is, about whether there is a need for mandating people to have private pensions. Australia, Hungary, Poland, Norway, Sweden, Switzerland, et cetera, have all gone down that route because they have looked and said, ``We have a problem. We do not have full coverage of private pensions. We will go down the mandatory route.''
New Zealand, the U.K. and Ireland have all rejected that approach, but they have also said, ``We still need to do something about it.'' As I mentioned, the U.K. and New Zealand are going down this automatic enrolment route which should be of interest. In Ireland, like the U.K., they established their independent pension reform commission. They had some worthy, significant and knowledgeable people appointed to the commission who all disagreed with each other. Essentially, they are split right down the middle. Half said, ``We must have compulsory private pensions;'' the other half said, ``We cannot have compulsory private pensions. People will just think of these contributions as a tax and it will be a very bad thing.'' I think that comes to the heart of the debate.
Senator Gerstein: That is helpful.
Mr. Whitehouse: Those countries I mentioned are good examples of countries where the starting point is similar to Canada's and where different solutions have been chosen.
I think those are the ones that I would suggest.
Senator Gerstein: Thank you, Mr. Whitehouse.
Senator Eggleton: I will make this quick. Some people in this country are advocating a Canada Pension Plan II or a supplementary Canada Pension Plan. This would help get around the problem where people are not investing enough in RRSPs to supplement the public funds. Since most do not have an RPP, per se, then that is the vehicle, but it is not getting the investment it should get.
If there was such a thing, it would be on a voluntary basis. That is what I am hearing. There are advantages, of course, to being part of that big investment fund and how that pays off eventually. What do you think of that in terms of what you know of these other countries? Could that work?
Mr. Whitehouse: It would be a defined contribution scheme but the money would be managed by the CPP investment board?
Senator Eggleton: Right.
Mr. Whitehouse: And it would be a voluntary scheme?
Senator Eggleton: Yes.
Mr. Whitehouse: The question is: How much unmet demand is there for private pensions out there at the moment, because people have these choices at the moment. They can go and get an RRSP, and so on. If you have something purely voluntary, you could have something that does not have much take-up. Most people who want a private pension have already got one through an RPP or an RRSP . In that case, you might want to think about some sort of automatic enrolment option.
There is also the issue that the CPP is being run as a reserve against the liabilities to pay defined benefit pensions. Their investment policy is different from that which you would want to run for individuals with individual defined contribution accounts. In particular, the CPP can keep a higher proportion of risky assets against its liabilities that you, as an individual, would ideally want in terms of the life cycling or moving to lower risk benefits. In that case, the CPP would have to operate as individual accounts in a different way than it currently operates the reserve fund.
Senator Eggleton: What kind of incentive might you give? As you say, they already have the opportunity to invest in RRSPs. That is voluntary and this is voluntary. Obviously, the first one is not providing for their needs. This one could, but how would you get them into it? What kind of incentive might you provide?
Mr. Whitehouse: A lot of the recent thinking now is that the traditional tax incentives — that is, your contributions that are deductible against your taxable income — are not particularly effective. They are worth more to you if you are a higher marginal tax rate payer. They are worth nothing to you if you do not pay any income tax. They are also difficult for people to understand. A lot of the studies and the studies that they have done in the U.S., including some experiments with real money and real people, have demonstrated that people understand matched contributions and that encourages take-up.
In the U.K., the new automatic enrolment scheme will require a 4 per cent employee contribution, 3 per cent from the employer and the government throws in 1 per cent. The Riester pensions that I mentioned in Germany are in a form of a matched contribution. New Zealand, with its Kiwi Saver, is going down a matched contribution route rather than tax relief. That is much more geared to giving incentives for lower income workers than you can ever manage through pure tax relief. You say, ``If you pay 5 per cent of your earnings into this scheme, we will pay in 2.5.'' That seems to be much more effective. Those are the innovations that are happening around the world.
Senator Eggleton: There is also an advocacy for financial literacy, saying that people need to get a better understanding of how much they should be saving, and many people may think that they have enough and then find that they do not. Is there anything going on in any of the OECD countries in that respect compared to Canada?
Mr. Whitehouse: Governments everywhere seem to be very reluctant to give the citizens the one piece of information that they really want to know and want guidance about, which is how much should they be saving for my retirement. I do not think they want the responsibility if that does not turn out to be enough in the end. We at the OECD have done detailed calculations for all of the member countries, Canada included, where public pensions are relatively low.
We will go back to the point we were at a little while ago about. You have got to then think what is the target replacement rate that people want to have. You have to think of that, and then how much investment returns will we assume.
We took the very simple way of saying we want everyone in countries like Canada with a lower than the OECD average replacement rate to move up to the OECD average. We want to move them up to the 60 per cent. Then we calculated how much people would need to save if they saved every year of their working life from age 20 to 65, if they had 10 missing years, or 20 missing years and so on. That number needs to be out there that people need to know, and the numbers for Canada are not very large. For an average earner, even with 20 years missing, for example, someone who only starts contributing when they are age 40, our figures suggest they need to contribute something like 8 per cent of their earnings. If they start at age 30, it is about 6 per cent, and if they start at about age 20, it is about 4 per cent. The numbers are not frighteningly large.
On the financial literacy issue in general, I am speaking at a conference in Washington on this next week. We will have a look at some initiatives that countries have been taking. It is difficult to have any successful program to turn people into people who are terribly interested in this. I am not particularly interested in making active investment decisions, and I am supposed to be an expert in this area. I cannot really expect anyone else to want to do it, which is why I think a lot of effort has to go into designing these defaults. We know that most people will go with a default. If we have a default that is right, then most people will end up doing something that is right.
One survey asked people whether they preferred making financial decisions or having their teeth pulled, and having teeth pulled out was much preferable to making financial decisions.
[Translation]
Senator Carignan: Do you have figures from country to country comparing the actual amount people have when they retire? A lot of people accumulate money in their RRSPs. As Senator Di Nino explained, they have a residence that will have appreciated in value. They are going to be able to make bequests, since they have too much money for their retirement. It can be the case that people have too much money. Are there studies that show the numbers of people who have accumulated too much money for their retirement? We know that there are people who do not have enough.
Taking money, setting it aside and letting it sit there has an economic impact. That money does not circulate in the economy, it does not stimulate consumption. If you think about it, there can even be a negative impact if people set aside too much. Do not think that I am saying that people are saving too much. Perhaps they are still not saving enough. Are there studies that look at the amounts of money people have when they retire? Are there studies that compare those figures by country?
[English]
Mr. Whitehouse: I am not sure there are any statistics that would shed any light on that. I am an economist. We think of the life cycle model of consumption, which is that you are supposed to save money when you are working and then you draw it down during your retirement. We actually find that many people, particularly in their younger retired earlier years, are still saving. In essence, they fit in with your view that they somehow have more income than they want.
Now, it may be, of course for the motive that you mentioned, that they want to bequeath the money to their children or to their favourite charity or whatever. It may be that they are worried about large health expenditures or long-term care expenditures coming on in the future.
We certainly see that in many countries where people have the opportunity, they tend to move as much of their money out of annuities as they possibly can, which could mean that they want to bequeath them. It could mean that they have a very misplaced underestimation of their own life expectancy and so do not think the annuities are a worthwhile purchase. In the U.S., for example, where people have annuity options, they get out of them as much as they possibly can.
It is a very tricky question about what people's actual desired consumption requirements are. As I say, many people do consume less than their income in retirement, which is not what economics would suggest you would expect.
The Chair: Thank you, Senator Carignan.
That concludes our session this evening, Mr. Whitehouse. This has been most interesting. You did exactly what we wanted. You provoked some discussion and gave us a good overview and a comparison between the Canadian situation and otherwise. We look forward to your publication, and we thank you for attending here this evening before the Standing Senate Committee on National Finance. We wish you well in that other meeting that you have tomorrow.
Mr. Whitehouse: Thank you very much.
The Chair: Thank you. The meeting is now concluded.
(The committee adjourned.)