Expanding CPP

Canadians don’t save enough for retirement. Expanding the CPP is a good idea, but it must be done slowly and carefully.

When the Canada Pension Plan was established in 1965 it was on a less than solid foundation. The combined contribution rate of 3.6% of pensionable earnings was much less than required to properly fund the benefits, and contributors could reach full benefit eligibility in as little as ten years.

It was only in the 1990’s that politicians addressed the need for adequate funding, which is now 9.9%, again split evenly between employers and employees.

The plan has many advantages. Administrative and investment expenses are low. Benefit entitlements transfer seamlessly if a member changes employer or province of residence.

The biggest disadvantage is that the benefit, even in combination with Old Age Security, does not replace enough pre-retirement income, and many Canadians have inadequate savings in private plans. In principle expanding the plan is a good idea. But there are several possible pitfalls.

Politicians might be tempted to initiate the new CPP benefit with inadequate funding, as they did in 1965. Fortunately this cannot be done without amending the Canada Pension Plan Act. So most proposals currently on the table have the increase in benefit being earned slowly. The Canadian Labour Congress version takes 40 years to reach the full new benefit.

Low income earners who retire with small CPP benefits are today also eligible for the Guaranteed Income Supplement (GIS). For them the combined post-retirement income often approaches or even exceeds pre-retirement income. An increase in CPP will be largely offset by reductions in GIS. Asking this group to contribute more for little change in benefit is not a good outcome. Accordingly some of the current proposals do not make deductions or provide benefits on earnings below $25,200.

Some finance ministers might be dreaming that this can somehow bail them out of their public pension funding deficiencies. It will not and it should not.

As the assets in the plan become very large finance ministers might be tempted to interfere with the independent asset management.

So the desirable elements in a new plan are a long phase in to full benefits, a focus on middle income earners, and rigorously protected independence from meddling by finance ministers.

It is surprising and disappointing that the federal government is so resistant to considering options. It is disingenuous to argue that the economy is too fragile to risk an increase in payroll deductions, particularly when the provinces have offered to defer the start date, or to phase in implementation even more slowly.

Finance Minister Flaherty has rejected all of these proposals. His “not now” sounds a lot like “not ever.”

In response Ontario Premier Wynne has proposed to establish a provincial program, with open arms to all other provinces that want to join. In principal many others would, but getting agreement on the details will be difficult, particularly when the lead is coming from Ontario.

The current Ontario government has a particularly sordid track record of lying about the cost of its decisions. For example the cancellation of two gas-fired electrical plants cost hundreds of millions more dollars than initially acknowledged.

Although the governing party has a new leader there is every reason to worry about the soundness of an Ontario led proposal for new benefits outside the CPP. And such a proposal would create inefficient administrative duplication.

Meanwhile advocacy groups have provided an instructive example of the use and misuse of polls.

The Canadian Federation of Independent Business poll of workers found that a vast majority said they preferred government policy solutions to boost retirement incomes that would involve lower taxes, new government incentives, or voluntary options over an expansion of CPP coverage and corresponding higher premiums. Only 18 per cent said they felt the best solution was “a mandatory increase in CPP/QPP premiums,”

In contrast the Canadian Association of Retired Persons found that 71 per cent of 2,654 members surveyed strongly support an expansion of CPP benefits and felt the government should not stay in office if it does not expand the CPP. CARP’s members would not be beneficiaries of the changes, but neither would they experience any cost.

As ever, voters respond positively when asked about improved benefits, and negatively when asked about new deductions from their paycheques.

Canadians have shown little enthusiasm for making adequate provision for their retirement. The right outcome is a slow and wisely managed increase to CPP. Our best hope is that Finance Minster Flaherty has had a mellowing holiday, and becomes a more willing partner.

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Reference Material

Pensions in Crisis

Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.

The initial incarnation of CPP required only 3.6% of pensionable earnings as contributions, and provided benefits to people well before they had been earned. This was eventually repaired in the nineties; otherwise, the plan would have gone broke.

Today’s CPP provides a pension at 65 of up to $12,780, for which employees and employers annually contribute a combined 9.9% of pensionable earnings. It is simple and cost-effective, but even when combined with Old Age Security (OAS) it does not provide an adequate pension.

After fruitless discussions with the federal government, Ontario proposes to go it alone. Details are not yet finalized and the scheduled start is not until 2017, no doubt reflecting a hope that federal policy will change and save them the trouble. Ontario’s plan, mandatory only for those not already in a pension plan, would require a worker to contribute for 40 years in order to receive an unreduced benefit. The only examples provided on the Ontario website are for employees who work the full 40 eligible years.

The Canadian Labour Congress (CLC) has one of the many proposals to increase the existing CPP. The CLC loves to quote a 2014 Nanos survey in which 88% of Canadians support “increasing the benefits Canadians receive through the Canadian Pension Plan.” Of course the survey does not mention the corresponding need for a substantial increase in contributions, nor the 40 year wait for unreduced benefits. (The same survey makes the shocking discovery that most Canadians would like lower taxes.)

The strongest support for improving benefits was from the oldest respondents, who would get only small benefit from the CLC proposal. There is one group who should actively oppose it. Low income workers are typically able to receive the Guaranteed Income Supplement when they retire, in addition to OAS and a small pension from the present CPP program. An increase in CPP will be largely offset by reductions in GIS. This needy group will be paying something for nothing.

As a result, some proposals for reform, otherwise similar to that of the CLC, do not require contributions or provide benefits on earnings below $25,200. These proposals have considerable merit as a cost-effective and comprehensive improvement to retirement savings for Canadians. 

But that virtue will be much clearer to actuaries and economists than to voters. Most Canadians, given a clear and detailed understanding of proposed changes, would be much more tepid in their enthusiasm for a program that takes so long to mature.

Hence, the rather vague communications from the three political parties. One can search their websites in vain for any indication of what they have in mind.

The Conservatives have argued, incorrectly, that CPP contributions are just another tax. Unlike unemployment insurance, the CPP funds have for five decades been operated entirely outside of government accounts and are only used to pay CPP beneficiaries. Having been opposed to any change, the Conservatives now say that they are willing to consult Canadians about a possible optional program.

How that might work is anyone’s guess. It appears to be just creating a different RRSP opportunity. Are there limits on how much can be contributed? Is it optional for employers too? Are contributions locked in until retirement as is the case for the base plan? This “plan” does not offer much.

The Liberals favour a mandatory program. Liberal Critic for Seniors John McCallum points out that changes would require the agreement of two thirds of provinces with two thirds of the population, so an agreement would have to be negotiated. Their position would tilt toward a large amount of excluded earnings to protect low income earners. Good.

More troubling is that they are not committed to adequate funding, which suggests that they might , as happened with the original CPP, cheat young contributors by paying older ones more benefits than their contributions have earned.

The NDP, which might be expected to follow the CLC recommendation, is so far silent about what exactly they have in mind—although it will clearly be a mandatory program. Caucus Press Secretary Greta Levy promises that “The exact figures on CPP will be announced before the election as part of an NDP government’s approach to retirement security.”

So voters actually trying to understand this complex issue don’t have much to work with.

The Conservatives are trying to fog the issue by musing about a no-hoper voluntary plan.

The Liberals appear to prefer a mandatory plan, but have not drawn any lines in the sand about how it must look. They may be willing to consider an irresponsible funding choice, or to be pushed that way by the provinces.

The NDP say they have advocated a CPP expansion for years—as well as strengthening GIS and reverting the age of OAS to 65. This adds to a growing list of expensive promises with no indication of how they are to be paid for.

Today’s CPP plan is appropriately funded and provides a cost-effective but modest portion of retirement funding. A long term reform is possible that would allow that portion to become more substantial.

The Conservatives have no real intention of making any changes. The Liberals and NDP say they do, but if they choose a wrong model they could do more harm than good.

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