Viewpoint 1: Pension plan best practices the US could learn from their neighbor up north
The United States faces ongoing challenges in ensuring retirement security for its workforce, with many Americans struggling to save adequately for their golden years, if at all. In early 2024 a major US technology company announced its plans to stop making contributions to its employees 401k accounts and instead offering a type of “old school” defined benefits plan known as a cash balance plan. This decision has increased discussion recently around how, and if, the US should adapt its retirement system.
The advantages of a pension plan over a 401k include a guaranteed retirement income, financial predictability, and employee retention and loyalty. As policymakers and employers grapple with this issue, they may find valuable insights by looking north to Canada. Canada’s pension system, particularly its organization around professional groups, stands out as a model of efficiency, sustainability, and adaptability, offers several innovative features that have contributed to better retirement outcomes for many of its citizens. By examining Canada’s best practices, the U.S. could potentially identify strategies to enhance its own retirement savings landscape and provide greater financial stability for its workforce.
First, let’s look at the variety of the Canadian pension system.
- Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
The CPP, and it’s Quebec corollary the QPP, are largely mandatory, earnings-based public pension plan that covers most working Canadians. Unlike the US Social Security system, the CPP and QPP are designed to be fully funded and sustainable in the long term. Its investments are managed by independent boards which have achieved impressive returns over the years.
- Jointly Sponsored Pension Plan (JSPP)
A JSPP is a type of pension plan where both employers and employees share responsibility, contributions and governance. They are common in healthcare, education and public service sectors. Smaller, single-employer pension plan sponsors are increasingly merging with a JSPP because of the reduction in administration, governance and liabilities burdens.
- Registered Pension Plans (RPPs)
These are employer-sponsored plans and many of which are defined benefit plans, which provide a guaranteed income in retirement. This contrasts with the trend in the U.S. towards defined contribution plans, which shift investment risk to employees.
- Target Benefit Plans (TBPs) or Shared Risk Plans (SRPs)
A TBP or SRP is a type of pension plan that combines elements of both defined benefit (DB) plans and defined contribution (DC) plans. It is designed to provide a stable retirement income to members. However, unlike traditional defined benefit plans, employers are isolated from financial volatility since the benefits can be adjusted based on the plan’s financial performance.
- Pooled Registered Pension Plans (PRPPs)
Introduced in 2012, PRPPs are designed to provide retirement savings options for employees of small businesses and self-employed individuals. They allow for the pooling of pension funds, which can lead to lower administration costs and potentially better investment returns.
A distinctive feature of Canada’s pension system is the organization around professional groups, particularly in the public sector. Numerous professional groups such as teachers, healthcare workers, and civil servants have their own dedicated pension plans. Additionally, multi-employer pension plans allow employees to continue to accumulate pension credits when they move between employers and are common in sectors characterized by high workforce mobility. These plans are tailored to the specific needs and career trajectories of the members within these professions.
Many of these professional group pension plans are defined benefit (DB) plans, which promise a specific payout at retirement, calculated through a formula based on salary and years of service. This provides financial security and predictability for retirees. Additionally, these professional group pension plans in Canada benefit from robust governance structures. Boards of trustees typically include representatives from both employers and employees, ensuring balanced oversight and decision-making.
Vitech CEO David Burns recently shared in an article posted by Global Banking & Finance Review that “pensions can also benefit from economies of scale and pooled investments, potentially leading to more stable long-term costs compared to the volatility of individual 401(k) investments.”
So how can the US potentially benefit from adopting or adapting some of these features? Here are 5 suggestions:
- Professional Group Focus: Like Canada, the U.S. can develop more pension plans organized around specific professional groups. For example, distinct pension plans for healthcare, legal services and faith-based professionals can cater to the unique career patterns and retirement needs of these groups.
- Enhanced Defined Benefit Plans: While defined contribution (DC) plans dominate the U.S. private sector, reinvigorating defined benefit plans within certain professional groups can provide greater retirement security. Hybrid plans, combining features of DB and DC plans, including risk sharing between employers and employees, can also be explored.
- Governance and Oversight: Establishing strong governance frameworks with representative boards can ensure that pension plans are managed in the best interests of their members. This includes transparent decision-making processes, regular audits, and performance reviews.
- Risk Pooling and Management: By pooling resources across professional groups, U.S. pension plans can achieve economies of scale, which can lead to better investment opportunities and more effective risk management. Collaborative models, where smaller plans join forces, can be particularly beneficial.
- Financial Literacy and Education: Enhancing financial literacy among plan members is crucial. Canada’s professional group pension plans often include education programs to help members understand their benefits and make informed decisions about their retirement. Encouraging financial literacy, especially among young people, should improve retirement outcomes.
By incorporating these elements, the US could work towards a more robust and inclusive retirement system that provides greater financial security for its population. However, it will take legislative support, public-private partnerships, stakeholder engagement and successful pilot programs before a broader rollout can commence. Embracing these changes will require concerted effort and collaboration, but the potential benefits for American retirees make it a worthwhile endeavor.
Viewpoint 2: Reassessing US pension strategies: alternatives to Canadian practices
While Canada’s pension system has its merits, as described above, there are significant reasons why the US should be cautious about adopting these practices. The differences in economic structure, labor markets, and cultural attitudes toward retirement savings mean that what works in Canada may not be suitable for the US. Additionally, while pension plans have advantages over a 401k plan, businesses must weigh these advantages for their employees against the significant upfront and ongoing costs and financial volatility associated with implementing and maintaining them. Let’s evaluate the challenges, issues and potential downsides of adopting a similar pension system in the US.
The challenges the US would need to overcome
- Economic Differences
The US and Canadian economies, while similar in some respects, operate under different conditions that affect the viability of pension models. The US has a larger economy with greater regional disparities, in addition to challenging political complexities. Implementing a nationwide pension system similar to Canada’s would require overcoming these disparities, which could prove logistically and financially challenging.
- Labor Market Variations
The US labor market is highly dynamic, with a significant portion of the workforce engaged in gig work, freelancing, and other non-traditional employment forms. The flexibility and portability required in the US labor market might not align well with the more structured Canadian pension models, which have traditionally been tied to long-term employment with single employers or within specific professional groups.
- Cultural Attitudes Toward Retirement Savings
Americans have historically valued individual choice and control over their retirement savings. The 401(k) system, with its emphasis on personal responsibility and investment decisions, reflects this attitude. Moving towards a system that mimics Canada’s more collective approach could face resistance from those who prefer the autonomy and potential for higher returns (despite the risks) associated with defined contribution plans.
Specific issues with Canadian pension models
- Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)
The CPP and QPP, while successful in Canada, may not be directly applicable to the US. The CPP’s mandatory nature and its management by an independent board might not align with the US’s preference for individual retirement accounts. Moreover, the political and economic differences between the two countries could complicate the implementation of a similar system in the US.
- Jointly Sponsored Pension Plan (JSPP)
JSPPs involve significant collaboration between employers and employees in terms of contributions and governance. In the US, where labor unions and collective bargaining are less prevalent than in Canada, establishing such a cooperative framework could be difficult. Additionally, the administrative complexity and costs associated with JSPPs might outweigh their benefits in the US context.
- Registered Pension Plans (RPPs)
While RPPs in Canada often offer defined benefits, they come with substantial financial commitments from employers. In the US, many companies have moved away from defined benefit plans due to the financial risks and liabilities they entail. Encouraging a return to such plans might deter business investment and growth, especially for small and medium-sized enterprises.
- Target Benefit Plans (TBPs) or Shared Risk Plans (SRPs)
TBPs and SRPs aim to balance employer and employee interests by sharing risks and rewards, while offering more predictable pension costs for employers compared to traditional defined benefit plans. However, these plans can be more complex to administer and communicate to employees. Employees may also face uncertainty about future benefits, as they can be adjusted based on the plan’s performance and funding status over time.
- Pooled Registered Pension Plans (PRPPs)
PRPPs aim to provide retirement savings options for employees of small businesses and the self-employed. However, the US already has mechanisms like Individual Retirement Accounts (IRAs) and Simplified Employee Pension (SEP) plans that serve a similar purpose. The added complexity of introducing a new system like PRPPs might not yield significant improvements over existing options.
Potential downsides of professional group pensions
- Lack of flexibility
Professional group pensions, while beneficial in some sectors, may lack the flexibility needed for the diverse US workforce. Many Americans change careers multiple times, and tying pensions to specific professions could limit mobility and adaptability in the labor market.
- Governance and bureaucracy
The governance structures of Canadian pension plans, which include employer and employee representatives, add layers of bureaucracy. While this ensures balanced oversight, it can also slow decision-making and increase administrative costs. The US pension system, which already faces challenges with complexity and regulation, might not benefit from additional bureaucratic layers.
While Canada’s pension system offers some appealing features, it is essential to consider the unique economic, labor, and cultural context of the US before attempting to adopt similar practices. Embracing changes that align with the US’s economic and cultural landscape will likely be more effective in ensuring retirement security for its workforce. A cautious, well-considered approach will help avoid the pitfalls of a one-size-fits-all solution and ensure that retirement savings systems remain robust, flexible, and inclusive.
