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Review: The Third Rail – Confronting Our Pension Failures by Jacquie McNish and Jim Leech

confrontThis review first ran in the Jan. 20 edition of The Hamilton Spectator.

The Third Rail: Confronting Our Pension Failures

By Jacquie McNish (senior Globe and Mail writer) and Jim Leech (CEO of the Ontario Teachers’ Pension Plan)

McClelland & Stewart

$29.95

It was all about the take-home pay back in my twenties.

Vacation days, along with health and dental benefits, were front and centre in my sleep-deprived new parent thirties.

Now that I’m in my forties and playing through the back nine of my career, I’ve come to fully appreciate my defined benefit pension plan.

I also expect the plan I’m paying into today will look nothing like the plan I draw from when I’ve called it a day and become a fulltime snowbird. And I hope the plan changes for the sake of my kids and yours.

Jim Leech and Jacquie McNish, authors of The Third Rail, warn Canada’s headed for a pension meltdown unless there are major reforms.

More than seven million Canadians will retire over the next 20 years.  We’re looking at two or fewer workers supporting every one retired Baby Boomer.  The Ontario Teacher’s Pension Plan already has just 1.5 active workers for every retired teacher.

It’s not just the record number of retirees that are a problem for pension plans. “Another challenge is falling mortality rates,” say Leech and McNish. “Retirees are dying at significantly slower rates, which means, to put it bluntly, there is not enough turnover. In the not so distant future, the average retiree will spend more time collecting their pensions than they did contributing to them during their careers.”

And the hits keep coming.  “Pension funds have not built in sufficient surpluses to cope with market and demographic stresses and employers are increasingly unable or unwilling to shoulder ballooning pension costs,” say the authors.

Since 1997, the percentage of Canadian employees covered by workplace pension plans has fallen to 36 per cent. Coverage drops to 25 per cent in the private sector where there’s a move to riskier and voluntary defined contribution plans that ding workers with far higher management fees.

Of the 60 per cent of Canadians who don’t have a workplace pension, most aren’t saving enough to maintain their current lifestyle into retirement. Federally funded benefits, which already cost taxpayers $38 billion a year and could triple by 2030, won’t make up the shortfall.  This spells serious trouble for an economy driven by consumer spending.

Instead of reforming Canada’s pension system, Leech and McNish say too many business, labour and political leaders are “preoccupied with laying blame or denying the enormity of the looming crisis. The call for reform is often shaped by envy, anger or fear. ”

But there’s a way forward and the authors spend most of their book highlighting new pension models taking shape in New Brunswick, Rhode Island and the Netherlands.

“The traditional defined benefit promise of a fully guaranteed fixed pension is rapidly fading in these regimes,” say the authors. “Taking its place is a new shared-risk pension that places a priority on robust plans with sufficient surpluses to weather market and demographic swings. When these surpluses are endangered, workers and employers can choose between adding more savings to the pension pot, or downsizing retirement benefits to ensure their plans for long-term viability.”

The stakes are high. Politicians need the courage to touch what the authors call the third rail. Business and union leaders need to come to the table.

“If we ignore these reforms, we will bequeath future taxpayers and workers with a pension bill that inevitably no one can afford. The solution to our crisis is smarter pension coverage, not less.”