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The Third Rail:Confronting Our Pension Failures
Over the next 20 years more than 7 million Canadian workers will retire. Baby boomers, the 45- to 65-year-olds who account for 42% of the country's workforce, will join the largest job exodus in Canadian history, moving to the promised land of retirement. Unless our crumbling pension system is reformed, many of these retirees will find this dreamland a bewildering and disappointing mirage.
In the early 1980s, consumers were setting aside 20% of their disposable incomes to their retirement plans; today the savings rate is a threadbare 2.5%. Retirement savings plans meant to build Canadians' personal war chests for their final years have failed to live up to their cheery promises of early retirement "freedom" - market returns are low, and financial fees are climbing. Moreover, retirement plans are now being compromised by high pension obligations and a shrinking workforce.
Canada has the capacity to diffuse this ticking pension time bomb with some hard choices, posits Leech. It's time for businesses, governments, unions, and employees to face these options and fix - and ultimately save - our pensions system, taking examples from Holland, New Brunswick, and Rhode Island - places in which new laws have been adopted to repair the pensions programs.
In the early 1980s, consumers were setting aside 20% of their disposable incomes to their retirement plans; today the savings rate is a threadbare 2.5%. Retirement savings plans meant to build Canadians' personal war chests for their final years have failed to live up to their cheery promises of early retirement "freedom" - market returns are low, and financial fees are climbing. Moreover, retirement plans are now being compromised by high pension obligations and a shrinking workforce.
Canada has the capacity to diffuse this ticking pension time bomb with some hard choices, posits Leech. It's time for businesses, governments, unions, and employees to face these options and fix - and ultimately save - our pensions system, taking examples from Holland, New Brunswick, and Rhode Island - places in which new laws have been adopted to repair the pensions programs.
183 pages, Hardcover
First published January 1, 2013
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October 6, 2016
The term the third rail comes from the method of providing electric power to a railway train through a conductor placed alongside or between the rails of a railway track. If you touch this you will be electrocuted. In politics the third rail has come to mean a political issue so charged that touching the issue would be the writing of your own political death sentence. It is relevant in pension issues, most particularly Social Security in the U.S.A. and the C.P.P. in Canada.
Pensions are not a topic of great interest to those under 60. As one nears the age of retirement one realizes just how vital pension income is to their quality of life in old age. I read this study with great interest. As a retired Canadian school teacher I am thankful to have a decent sized pension. I wish it were the case for all Canadians who have been hard-working employees for 30 to 40 years. The final chapter of the book The Third Rail should be of importance to everyone, even those who feel secure about their retirement plans because the RRSP system has proven to be inadequate. "New federal and provincial legislation are needed to change the structure and governance of existing plans. New laws would encourage greater workplace participation in pensions, higher savings rates, and a more effective fund management system. For years, federal tax rules effectively prevented pension funds from building large surpluses to fortify pension plans. Although these rules were recently relaxed, our pension plans are still living with the legacy of funding damage. Pension reform today must be a continuous exercise. The tradition of large reforms every few decades no longer makes sense. Federal and provincial governments have to devote more resources to monitoring the health of this essential industry. Prime Minister Drees of the Netherlands reinforced the pension system by introducing strict funding and governance rules. Unlike in North America, for example, where exuberant bosses often paid little attention to how they were going to fulfill future pension promises, the Netherlands has for decades required rigorous funding standards. Workplace pension plans had to be fully funded, meaning they were required to have enough assets set aside to pay pension obligations. Oversight of the funds was transferred outside companies to organizations known as foundations, or stichting. Foundation boards were made up of an equal number of employee and employer representatives responsible for governing pension funds. The system restricted the ability of employers to meddle with pension savings, shielding Dutch plans from many of the abuses and poor management practices that toppled or threatened North American plans in recent years. Drees’s pension model laid the foundation for a sturdy pension system that few could have imagined in the recovering postwar nation. Today more than 90 per cent of Dutch employees are members of a workplace retirement plan. The wide coverage has enabled a small country of 17 million people to build one of the world’s richest pension systems."
Good pensions are provided to all employees in the Netherlands regardless if they are employed in the public or the private sector. After reading The Third Rail I googled the pension organization ABP which exists in Europe. This pension fund has been in existence for almost 100 years. Like the failed pension funds discussed in the book, the ABP has had to make adjustments due to a lengthening of life spans, downturns in the market etc. but unlike some of the cities in North America they did not cut pensions by up to 55%, the market turned around following the dot com crises and the pension fund held strong.
Pensions are not a topic of great interest to those under 60. As one nears the age of retirement one realizes just how vital pension income is to their quality of life in old age. I read this study with great interest. As a retired Canadian school teacher I am thankful to have a decent sized pension. I wish it were the case for all Canadians who have been hard-working employees for 30 to 40 years. The final chapter of the book The Third Rail should be of importance to everyone, even those who feel secure about their retirement plans because the RRSP system has proven to be inadequate. "New federal and provincial legislation are needed to change the structure and governance of existing plans. New laws would encourage greater workplace participation in pensions, higher savings rates, and a more effective fund management system. For years, federal tax rules effectively prevented pension funds from building large surpluses to fortify pension plans. Although these rules were recently relaxed, our pension plans are still living with the legacy of funding damage. Pension reform today must be a continuous exercise. The tradition of large reforms every few decades no longer makes sense. Federal and provincial governments have to devote more resources to monitoring the health of this essential industry. Prime Minister Drees of the Netherlands reinforced the pension system by introducing strict funding and governance rules. Unlike in North America, for example, where exuberant bosses often paid little attention to how they were going to fulfill future pension promises, the Netherlands has for decades required rigorous funding standards. Workplace pension plans had to be fully funded, meaning they were required to have enough assets set aside to pay pension obligations. Oversight of the funds was transferred outside companies to organizations known as foundations, or stichting. Foundation boards were made up of an equal number of employee and employer representatives responsible for governing pension funds. The system restricted the ability of employers to meddle with pension savings, shielding Dutch plans from many of the abuses and poor management practices that toppled or threatened North American plans in recent years. Drees’s pension model laid the foundation for a sturdy pension system that few could have imagined in the recovering postwar nation. Today more than 90 per cent of Dutch employees are members of a workplace retirement plan. The wide coverage has enabled a small country of 17 million people to build one of the world’s richest pension systems."
Good pensions are provided to all employees in the Netherlands regardless if they are employed in the public or the private sector. After reading The Third Rail I googled the pension organization ABP which exists in Europe. This pension fund has been in existence for almost 100 years. Like the failed pension funds discussed in the book, the ABP has had to make adjustments due to a lengthening of life spans, downturns in the market etc. but unlike some of the cities in North America they did not cut pensions by up to 55%, the market turned around following the dot com crises and the pension fund held strong.
July 24, 2016
The book posits that pension reform is needed because the number and unexpected longevity of baby boomers adds too much stress on pensions. Therefore, pension promises will be void for the next generation and maybe even for the boomers. Unreformed, younger workers will pay more into pensions and receive much less. If younger workers decide not to pay in, or even if they do, longer living boomers may cannibalize the system not only for the young, but maybe even for themselves. Actuaries, politicians, employers, and unions have known about this for years, though nearly everyone, except actuaries, have continually decided to kick the problem down the road for others to solve.
The suggested solutions to the problem are variations on mutual sacrifice. Retirees accept a small reduction, younger workers put more in pensions and expect slightly less on retirement, employers contribute slightly more, and unions ease off pressuring employers for expanded pensions. To accomplish this, the general public, the tax agencies, unions, politicians, actuaries, lawyers, employees, and employers must cooperate and plan long-term for themselves and one another by sacrificing up front.
The solutions are derived from three models tested in Rhode Island, New Brunswick, and the Netherlands, where pension fragility and underfunding nearly wiped out pensions for everyone. These places acted sooner because they had to. People tend to wait to solve problems only when they become an emergency.
The argument against pension reform and against pensions generally tends to be that some people have gold-plated benefits, usually government pensions, and these pensions' existence are a giant leech on taxpayers.
The argument for keeping pensions is that they are larger pools of money that are invested in financing public and private construction and infrastructure projects. Fracturing the pools of investments will make each individual fund smaller and less able to invest in roads, bridges, transportation, etc. Further, fracturing the funds means each smaller fund will have to been overseen by its own individual management company, which will want more of a percentage of the smaller pools. Pensioners in the smaller funds will lose more to management fees in smaller funds than they would from one management company in a larger fund. Society will lose out since smaller funds can only invest in smaller public and private projects.
There is no short-term monetary gain from stripping pension from workers that currently have them, other than to score political points and trick people into thinking their interests are being served by making current pension-holders poorer long-term. Also, this keeps another segment of the population down and working hard to save so they can eat in old age. The argument for dismantling pensions sounds like: "Government workers/teachers/doctors/nurses/pipefitters have cushy pensions, and you don't. Let's tear their pensions from them out of spite, and somehow your lot will improve. Somehow."
The argument against stripping away pensions is that this will leave a larger percentage of people who are indigent in future. Indigent workers are already covered under a federally mandated old age pension scheme. Pulling pensions away from people who are working and actively contributing to them will put more people onto the federal purse by putting them on age indigent pensions or welfare. Making people poorer by not allowing them to contribute towards their own retirement will cost the government and the public more in the long-term because these people will be on indigent pensions or welfare.
It comes down to a question of trust. Who do you trust? Do you trust all the players to cooperate for mutual benefit or are you out to get yours because you think some of the other players are?
Young Canadians
If there is pension reform and you have a pension, you may have income in your later years.
If there is no pension reform and you have a pension, you are fucked now and in the future, and you are stuck paying for old people who have expressly decided to fuck you.
If you have no pension, you better save via RRSPs, or you may be able to rely on old age indigent pensions or welfare in future.
Older Canadians
If there is pension reform and you have a pension, you might have to give up 1-5% overall and/or work until you are 67 to collect retirement in order to allow that reform.
If there is no pension reform and you have a pension, you may be ok or you might lose 50%-1% of your benefits overall. Either way, you can still retire earlier than 67.
If you have no pension, you had better have saved via RRSPs, but you can also rely on the old age indigent pensions or welfare.
Final Thoughts
It is a difficult, though middle-class, political question with an easy abstract solution. The debate over existing public pensions will be a key issue of Canadian politics in 2014.
The answer I want to know is: if pensions save the government/public $ long-term, how much should Canadians increase pension-options for people up and down the economic chain? Where is the tipping point between too much pension and not enough for as many people as possible?
The suggested solutions to the problem are variations on mutual sacrifice. Retirees accept a small reduction, younger workers put more in pensions and expect slightly less on retirement, employers contribute slightly more, and unions ease off pressuring employers for expanded pensions. To accomplish this, the general public, the tax agencies, unions, politicians, actuaries, lawyers, employees, and employers must cooperate and plan long-term for themselves and one another by sacrificing up front.
The solutions are derived from three models tested in Rhode Island, New Brunswick, and the Netherlands, where pension fragility and underfunding nearly wiped out pensions for everyone. These places acted sooner because they had to. People tend to wait to solve problems only when they become an emergency.
The argument against pension reform and against pensions generally tends to be that some people have gold-plated benefits, usually government pensions, and these pensions' existence are a giant leech on taxpayers.
The argument for keeping pensions is that they are larger pools of money that are invested in financing public and private construction and infrastructure projects. Fracturing the pools of investments will make each individual fund smaller and less able to invest in roads, bridges, transportation, etc. Further, fracturing the funds means each smaller fund will have to been overseen by its own individual management company, which will want more of a percentage of the smaller pools. Pensioners in the smaller funds will lose more to management fees in smaller funds than they would from one management company in a larger fund. Society will lose out since smaller funds can only invest in smaller public and private projects.
There is no short-term monetary gain from stripping pension from workers that currently have them, other than to score political points and trick people into thinking their interests are being served by making current pension-holders poorer long-term. Also, this keeps another segment of the population down and working hard to save so they can eat in old age. The argument for dismantling pensions sounds like: "Government workers/teachers/doctors/nurses/pipefitters have cushy pensions, and you don't. Let's tear their pensions from them out of spite, and somehow your lot will improve. Somehow."
The argument against stripping away pensions is that this will leave a larger percentage of people who are indigent in future. Indigent workers are already covered under a federally mandated old age pension scheme. Pulling pensions away from people who are working and actively contributing to them will put more people onto the federal purse by putting them on age indigent pensions or welfare. Making people poorer by not allowing them to contribute towards their own retirement will cost the government and the public more in the long-term because these people will be on indigent pensions or welfare.
It comes down to a question of trust. Who do you trust? Do you trust all the players to cooperate for mutual benefit or are you out to get yours because you think some of the other players are?
Young Canadians
If there is pension reform and you have a pension, you may have income in your later years.
If there is no pension reform and you have a pension, you are fucked now and in the future, and you are stuck paying for old people who have expressly decided to fuck you.
If you have no pension, you better save via RRSPs, or you may be able to rely on old age indigent pensions or welfare in future.
Older Canadians
If there is pension reform and you have a pension, you might have to give up 1-5% overall and/or work until you are 67 to collect retirement in order to allow that reform.
If there is no pension reform and you have a pension, you may be ok or you might lose 50%-1% of your benefits overall. Either way, you can still retire earlier than 67.
If you have no pension, you had better have saved via RRSPs, but you can also rely on the old age indigent pensions or welfare.
Final Thoughts
It is a difficult, though middle-class, political question with an easy abstract solution. The debate over existing public pensions will be a key issue of Canadian politics in 2014.
The answer I want to know is: if pensions save the government/public $ long-term, how much should Canadians increase pension-options for people up and down the economic chain? Where is the tipping point between too much pension and not enough for as many people as possible?
January 23, 2015
The traditional social compact was that public servants accepted salaries lower than the private sector in return for better pensions. Today, public workers often retain the pensions but now have better job security and salary expectations than private sector workers. So while the authors suggest we should aspire to better pensions rather than strip away public sector defined benefit pensions, this inconvenient trend is unaddressed. A disconnect that feeds social discord and envy.
But the book remains a refreshing and fairly apolitical call to action. It asks that contributors and recipients both accept the costs of funding universal, comprehensive pensions. This honest acknowledgement is the only way to solve our pension woes and encourage intergenerational cooperation. In three short case studies this point is hammered home. The brevity of this book - almost an old fashioned pamphlet or essay - is its greatest strength. It describes an attractive idea briefly, cogently, and persuasively.
Follow me on Twitter: @Dr_A_Taubman
But the book remains a refreshing and fairly apolitical call to action. It asks that contributors and recipients both accept the costs of funding universal, comprehensive pensions. This honest acknowledgement is the only way to solve our pension woes and encourage intergenerational cooperation. In three short case studies this point is hammered home. The brevity of this book - almost an old fashioned pamphlet or essay - is its greatest strength. It describes an attractive idea briefly, cogently, and persuasively.
Follow me on Twitter: @Dr_A_Taubman
December 30, 2022
UPDATED 2022:
Well, now I work for a pension firm and this was a very good re-read. Updating the number of stars.
---
Pensions! Not as boring as you might think!
Ok, so Jim Leech is focusing more on the impact of underfunded pension agreements on private, municipal, and provincial systems. Doesn't come up with a panacea for the alleged lack of retirement savings amongst certain Canadian income brackets. Does a great job at picking out three case studies: New Bruinswick, Rhode Island and the Netherlands, which each have their own quirks and challenges.
He does a good job of explaining the difference between defined benefit and defined contribution, while laying the groundwork for the gradual erosion of Canadian pension coverage. Does lack a little bit of visioning for the future: he's confronting our failures, not suggesting too many improvements. Worth a read to learn some of the basics.
Well, now I work for a pension firm and this was a very good re-read. Updating the number of stars.
---
Pensions! Not as boring as you might think!
Ok, so Jim Leech is focusing more on the impact of underfunded pension agreements on private, municipal, and provincial systems. Doesn't come up with a panacea for the alleged lack of retirement savings amongst certain Canadian income brackets. Does a great job at picking out three case studies: New Bruinswick, Rhode Island and the Netherlands, which each have their own quirks and challenges.
He does a good job of explaining the difference between defined benefit and defined contribution, while laying the groundwork for the gradual erosion of Canadian pension coverage. Does lack a little bit of visioning for the future: he's confronting our failures, not suggesting too many improvements. Worth a read to learn some of the basics.
January 12, 2015
excellent book. clarifies the pension plans and creates understanding of what needs improving
January 29, 2018
A little dated - it was finished in 2013 if memory serves - but given its topic, it's very on-point right now. Some good history and real-life examples of successful changes to pension plans to help get them set up for the future. For someone approaching retirement, it's a good read, but be prepared to have it scare you a little.
It would be nice to see what's changed between when the book was written and today. A tall task, but given the attention from the Sears debacle, it should be front and centre in most people's minds ...
It would be nice to see what's changed between when the book was written and today. A tall task, but given the attention from the Sears debacle, it should be front and centre in most people's minds ...
October 3, 2017
Forget horror.. this is the kind of book that keeps me awake at night.
December 29, 2017
Well-researched, well-written. Makes sense of how pensions succeed and how they fail and what can be done to save them.
May 1, 2015
I work in the group retirement industry and enjoy reading books on financial planning and planning for retirement ... so this book caught my eye and I found it interesting.
This book provides information about Canadian retirement plans available including Canada/Quebec Pension Plan (C/QPP), Old Age Security (OAS), Guaranteed Income Supplement (GIS) and workplace savings plans (defined benefit plans and defined contribution plans). The authors, Leech and McNish, provide their opinions on how the retirement landscape should be improved because the majority of Canadians aren't saving enough to fund their retirements.
It was interesting to read the three case studies of pensions plans that were failing and managed to turn themselves around:
* New Brunswick
* Rhode Island
* The Netherlands
While I think the authors did a good job in analyzing the current situation and providing recommendations, I think they should have also placed emphasis on the responsibility of individual Canadians to save more.
Part of my job is to talk with people about saving for retirement. There are many who are on track and will be able to maintain their lifestyles in retirement. But there are many more who aren't. In a lot of cases, they assume they are saving enough so it's a bit of a shock for them when I show them that they aren't but then I help them get on track. I know that some can't afford to save more so I'm glad they are doing what they can. But there are others who live in la-la-land. For example, I was talking with a young guy (about 25-years-old) a couple weeks ago. He makes about $60,000 a year, has no retirement assets saved and was contributing just $40 a month to a retirement plan (he could afford to contribute more but he didn't think he had to). He was extremely surprised and dismayed when he discovered that he won't be able to retire early at 55 and maintain his pre-retirement lifestyle. Seriously?!
I think it's great that Canada and various provinces are looking at reform and ways of making us save more for retirement but I also think a lot of it comes down to ourselves. If you don't also save for your retirement, you can't be surprised when you can't have the one you want when you get there.
http://www.teenaintoronto.com/2015/04...
This book provides information about Canadian retirement plans available including Canada/Quebec Pension Plan (C/QPP), Old Age Security (OAS), Guaranteed Income Supplement (GIS) and workplace savings plans (defined benefit plans and defined contribution plans). The authors, Leech and McNish, provide their opinions on how the retirement landscape should be improved because the majority of Canadians aren't saving enough to fund their retirements.
It was interesting to read the three case studies of pensions plans that were failing and managed to turn themselves around:
* New Brunswick
* Rhode Island
* The Netherlands
While I think the authors did a good job in analyzing the current situation and providing recommendations, I think they should have also placed emphasis on the responsibility of individual Canadians to save more.
Part of my job is to talk with people about saving for retirement. There are many who are on track and will be able to maintain their lifestyles in retirement. But there are many more who aren't. In a lot of cases, they assume they are saving enough so it's a bit of a shock for them when I show them that they aren't but then I help them get on track. I know that some can't afford to save more so I'm glad they are doing what they can. But there are others who live in la-la-land. For example, I was talking with a young guy (about 25-years-old) a couple weeks ago. He makes about $60,000 a year, has no retirement assets saved and was contributing just $40 a month to a retirement plan (he could afford to contribute more but he didn't think he had to). He was extremely surprised and dismayed when he discovered that he won't be able to retire early at 55 and maintain his pre-retirement lifestyle. Seriously?!
I think it's great that Canada and various provinces are looking at reform and ways of making us save more for retirement but I also think a lot of it comes down to ourselves. If you don't also save for your retirement, you can't be surprised when you can't have the one you want when you get there.
http://www.teenaintoronto.com/2015/04...
August 27, 2014
For a non - fiction book it was a compelling read, making the topic of pension funding accessible.
The authors do gloss over some of the more difficult political and social questions that allow tax payers off the hook. Underfunded public pensions benefitted governments (and thus tax payers) and let them off the hook in the past, allowing them to collect and pay lower taxes then and punt the question of funding the pensions adequately to future generations. Much of the political rhetoric now does not recognise this and places the blame for shortfalls at the feet of current workers contributing to the underfunded plans in question.
Yes, the authors do gloss over that but it doesn't detract from the issue of pension undefunding which is presented in an accessible format by Jim Leech and his coauthor.
The authors do gloss over some of the more difficult political and social questions that allow tax payers off the hook. Underfunded public pensions benefitted governments (and thus tax payers) and let them off the hook in the past, allowing them to collect and pay lower taxes then and punt the question of funding the pensions adequately to future generations. Much of the political rhetoric now does not recognise this and places the blame for shortfalls at the feet of current workers contributing to the underfunded plans in question.
Yes, the authors do gloss over that but it doesn't detract from the issue of pension undefunding which is presented in an accessible format by Jim Leech and his coauthor.
February 2, 2014
Humbling, terrifying, informing, and motivating. The authors take a complex subject and simplify the principles by highlighting three examples of pension reform. The underlying message to me, was, Let's be adults, everyone, and save for our future by planning for income in retirement one way or the other. Stripped of the political implications, it only makes sense to be prudent and practical in personal and state financial planning. Excellent read, with stories instead of statistics to make their points.
May 5, 2014
Even though it is short it was rather long. Only kept at it because I am really motivated to understand the subject matter.
Michael Lewis definitely sets the bar for comprehensible books on economics.
What they actually say about how pensions should operate. Not at all fair.
Michael Lewis definitely sets the bar for comprehensible books on economics.
What they actually say about how pensions should operate. Not at all fair.
June 5, 2014
A must read for anyone in the Canadian Pension industry. Especially if you don't think the system needs fixing!
July 28, 2015
A readable and accessible book for helping the average person understand pension issues. The need for reform was well presented.
April 3, 2016
Well-written description of pension situation in Canada. Illustrations of problems encountered elsewhere (Rhode Island, Netherlands) illuminating.
Displaying 1 - 15 of 15 reviews