In a new book out Tuesday, Ontario Teachers' Pension Plan chief executive Jim Leech calls for politicians and other leaders to take advantage of currently high levels of awareness and debate about pension shortfalls to address the issue before it's too late.
"Generally speaking in Canada, we're not looking into the abyss, we're a kilometre back," Leech said during an interview with The Canadian Press.
"But that's where we're going. So why not take action today, which won't be as painful?"
Longer life expectancies, high debt levels, volatile markets and low interest rates that translate into lower returns on investments have all contributed to pension shortfalls and raised concerns about how the current system will handle the influx of baby boomers set to retire over the coming years.
In "The Third Rail," co-authored with Globe and Mail journalist Jacquie McNish, Leech cites Rhode Island and New Brunswick as examples of jurisdictions that took drastic measures to address their shortfalls including deep cost cutting to municipal jobs and services.
Leech proposes three solutions to overhaul Canada's pension system.
The first focuses on individuals in the wage level of $30,000 to $100,000 a year, a group Leech considers the "ground zero of the whole problem," because so many people in that demographic are retiring in the next decade without enough savings.
The easiest and most efficient way to address that issue, according to Leech and McNish, is to enhance the Canada Pension Plan, so that people in the $30,000 to $50,000 wage group see their benefit doubled, and those in the $50,000 to $100,000 range see it extended at the current benefit level.
That would mean someone in the $50,000 wage group would see their pension contribution go up from about $2,600 to $2,900 a year, in exchange for reaching up to a 50 per cent income replacement in retirement, Leech said.
"The alternative if we don't do something is that payments under Old Age Security and Guaranteed Income Supplement are going to expand dramatically, and every dollar of that is on the shoulder of the taxpayer," he said.
Leech would also like to see some action taken to stem the decline of defined benefit plans, which he calls the least expensive way to provide a pension to workers, while amending them to provide more flexibility and include risk-sharing between employers and employees.
Defined benefit pension plans are ones through which an employer promises a specified, predetermined monthly benefit. They differ from defined contribution pension plans, where the formula to come up with the employer's and employee's contributions is defined and known in advance, but not the benefit to be paid out.
For the self-employed or those in small businesses — individuals who typically don't have retirement savings — Leech believes the most appropriate route would be a defined contribution plan, but one that is mandatory to invest into and can include a more diverse asset mix and lower management fees.
Given that most politicians are reluctant to review pension reform, often considered the "third rail" — an issue too controversial to touch without getting hurt — Leech applauded efforts by the Ontario government to bring the issue of pension reform to the forefront.
The Liberal government in that province is considering creating its own pension plan if adequate changes aren't made to CPP, a move that was criticized last week by former Ontario Finance Minister Dwight Duncan, who said the provinces would be better off coming up with an agreement on increasing CPP payouts.
The P.E.I. government also said earlier this month that it was planning to introduce a number of reforms to its public sector pension plans because of the strain changing demographics and the global economic downturn have placed on those plans.
Whatever shape possible reforms take, Leech, who will himself be retiring from the pension fund at the end of this year, said the key message he wants readers to take away from the book is to stop avoiding the subject.
It's a message he also hopes will resonate with a younger generation, which will face the fallout of the current pension crisis not only in retirement but also as the taxpayers who will have to bear the brunt of the shortfall for years beforehand.
"You can make small incremental changes to your lifestyle, to these plans, and they have huge, compounding effects over time that will solve the problems," he said.
"The ideas are there, it really just takes people to sit down in a non-political way and put it together.
The time is now that we have to take action."