Reforming the Quebec Pension Plan to give control back to workers

MONTREAL, May 20 /CNW Telbec/ - With a further increase being proposed in the Quebec Pension Plan contributions paid by workers, Quebec should be looking instead to a reform of its public retirement savings system based on the Chilean experience, as about 30 countries have done. This idea is suggested by Éric Duhaime, holder of a master's degree from the École nationale d'administration publique and a consultant in democratic development, in an Economic Note published today by the Montreal Economic Institute (MEI).

"The best way to guarantee the future of young Quebecers' retirement savings while ensuring benefits for current retirees, as Chile has done, would be to give workers currently in the labour force the freedom to invest for their old age in their own retirement savings accounts rather than requiring them to rely on the Caisse de dépôt et placement du Québec," Mr. Duhaime says.

The situation of the Quebec Pension Plan

The Quebec Pension Plan came into effect in 1966 and is a universal government-administered retirement plan that all workers from ages 18 to 70 are required to pay into. Its financial position has become increasingly precarious because of higher life expectancies, a low birth rate and slower-than-expected wage growth. As a result, contribution levels have been raised from 3.6% of eligible work income between 1966 and 1986 to 9.9% since 2003. In other words, future generations will have to pay much more than their elders for the right to receive comparable or possibly lower benefits.

Despite these major increases in contributions, we are still below the break-even rate that would enable a stable reserve to be maintained. At the current rate, the QPP reserve will start falling in 2023 and will be completely empty in 2037. The heavy losses registered by the Caisse de dépôt et placement du Québec in 2008, in particular, have brought this crucial date forward to 2037, whereas it had been thought previously that the reserve would run out in 2051.

Whereas in 1986 there were seven workers for each retiree, today there are only three, and this ratio will be just two workers per retiree in 2020. A system like the QPP, under which current contributions by workers are paid into a reserve that is used to pay benefits to current retirees, assumes that the number of workers is much higher than the number of retirees. Otherwise, workers have to support far too heavy a burden to keep the system afloat.

Ideas of reform to give control back to workers

Chile was facing similar problems three decades ago. The country then launched a reform relying on the virtues of individual responsibility. The labour minister at the time, José Pinera (who holds a Ph.D. in economics from Harvard University and is the founding president of the International Center for Pension Reform), replaced the public pension system with a system of individual capitalization and retirement savings accounts, with each worker having his own account under private sector management.

Private mutual fund administrators are authorized to manage these retirement savings accounts within the framework of strict rules set by the government. Workers choose freely among approved funds and administrators based on their risk tolerance, age, financial security, family, etc. Today, 95% of Chilean workers are covered by the new system. In the first 26 years after it took effect, savers' annual return, with inflation taken into account, averaged 10.3%.

The complete Economic Note published today, titled Reforming the Quebec Pension Plan to give control back to workers, may be consulted free of charge at www.iedm.org

The Montreal Economic Institute (MEI) is an independent, non-partisan, non-profit research and educational organization. Through studies and conferences, the MEI informs public debates in Quebec and Canada by suggesting wealth-generating reforms based on market mechanisms.

SOURCE Montreal Economic Institute

For further information: For further information: and interview requests: Ariane Gauthier, communications coordinator, Montreal Economic Institute, (514) 273-0969 ext. 2231, Cell: (514) 603-8746, agauthier@iedm.org


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