Financial pundits are virtually unanimous in saying that an alarming number of Quebecers are not saving enough for retirement. Public plans provide only a basic level of retirement income, so workers with no company pension plan or insufficient personal savings may find their lifestyle takes a substantial hit when they exit the workforce. Alain Dubuc’s column entitled Retraite : nous ne sommes pas prêts, posted on the Simplement Brillant site, brings the extent of the challenges ahead into sharp focus.
It has been said time and again that saving isn’t easy or particularly pleasant either. It’s a classic case of “present pain for future gain”, which is clearly at odds with today’s instant gratification society. And to make matters worse some people find it very difficult, or simply impossible, to put money aside.
So, preparing for retirement on your own usually isn’t a simple task, which is why people who work with a financial advisor, or who are lucky enough to be part of a group plan, are generally a step ahead of the rest.
The gap between these two groups is significant, and worrisome. Large numbers of Quebecers are facing financial insecurity in old age and since the solution—saving—ideally needs to start early, there’s some urgency that action be taken now.
It’s very tempting in such circumstances to implement another type of compulsory savings plan that would force people to put some money aside, which, in itself, is not a new idea. The Québec Pension Plan (QPP) is already a type of compulsory savings vehicle to which both workers and employers are required to contribute. The QPP advantage is that when combined with other public plans like Old Age Security and the Guaranteed Income Supplement, every person is assured a basic level of retirement income. A very modest income to be sure, but these sources at least keep pensioners from falling into abject poverty.
That being said, does having an existing model necessarily mean it’s the best way to address the situation going forward? The answer hinges largely on your perspective on matters of personal finance.
Forcing people to save might solve the problem of those who aren’t doing anything, but this type of solution is also fraught with significant issues.
The first is philosophic: who should decide what a person does with their money? The state, or the one who earns it?
Banking some money is generally a good idea, of course, but there are also many legitimate reasons someone might decide not to save: starting up a business, investing to buy an income property, paying for unexpected renovations…the list is almost endless. And for a society that is still based largely on the precept of individual freedom, having the state impose an additional constraint on something as personal as income raises some important issues, to say the least.
Does freedom of choice equal more saving?
Compulsory usually means inflexible, which is one of the reasons why something carrying the mandatory label doesn’t get much traction with the general population. Everyone has different needs for their money so it’s only natural to want to keep the biggest say in what you can do with it.
Does this mean the end of the road for helping people save?
Somewhere between sitting on your hands and a Big Brother scenario are approaches that haven’t been explored yet…but should be. Seen from this angle voluntary retirement savings plans (VRSP), which may become reality as early as the end of this year, bring some particularly interesting innovations to the table and there is plenty of potential yet to be explored.
One of the cornerstones of the VRSP is to make workplace savings accessible (via payroll deductions) to all workers at SMEs that employ more than 5 employees and have no existing pension plan (SMEs will have two years from the official date VRSPs come into effect to comply with this new requirement). The very fact of being able to save at the source may simplify matters for many workers.
What’s even better is that the automatic enrolment feature of VRSPs will make saving seem almost like a fait accompli for new members, just as if they had been forced to save…the difference being that they will always be free to do something else with their money if they wish. This means that although VRSPs will be automated to the point of a slight resemblance to mandatory plans, they will always be voluntary.
It’s what could be called a sort of “nudge in the right direction” but still allows each person freedom of choice, if they take the trouble to exercise their option. This is a totally new approach in Quebec and whether it will be successful remains to be seen. But considering the alternative, i.e. compelling people to save with no way out, it seems even more urgent that VRSPs be put to the test.