Originally published in the Financial Post, the National Post, Canada.com, Make Money, Regina Leader Post, Ottawa Citizen, the Vancouver Province, Victoria Times Colonist and Edmonton Journal on July 6th, 2011. To go to the Financial Post website please click here
Even though a “Big CPP ” was championed by losing parties in the recent election, the idea of almost doubling benefits paid out by the Canada Pension Plan refuses to die.
If a new and mandatory national defined benefit [DB] pension plan proposed by retired Finance Department mandarin Keith Horner gets traction, CPP and QPP benefits would jump from 25% to 40% of earnings up to $48,300 and from zero to 25% on a bigger salary base of $96,600.
In a 40-page paper published Tuesday by the Institute for Research on Public Policy, Mr. Horner makes the case for something just short of the Big CPP championed by the NDP, the Canadian Labour Congress and the Liberals in the election won by the Conservatives.
They felt building on the CPP was the best way to make up for the gradual loss of old-fashioned DB pensions being phased out by private-sector employers. The need is certainly there: Canadians haven’t saved enough to make up the difference. Mr. Horner says 28% of modest-income earners ($25,000 to $60,000 per year) and 29% of middleincome earners ($60,000 to $100,000 per year) aren’t saving enough to replace 90% of their working incomes.
Finance Minister Jim Flaherty hasn’t ruled out a “modest” enhancement to the CPP, but the Conservatives instead pushed employer-sponsored Pooled Registered Pension Plans (PRPPs), which get only scant attention in Mr. Horner’s report.
Mr. Horner bills his National DB Plan as a modest enhancement of CPP, but “modesty, like beauty, is in the eye of the beholder,” quips Mercer partner Malcolm Hamilton. “To double the earnings limit and then to further increase the benefit on earnings up to the YMPE by 60% is, in my view, a fairly ambitious expansion of the CPP.”
YMPE is Year’s Maximum Pensionable Earnings, currently set at $48,300. It makes sense to base CPP contributions on a larger salary base. Doubling YMPE to $96,600 has also been championed by Morneau Shepell chief actuary Fred Vettese, but he doesn’t think Mr. Horner’s plan will be viable unless it offers a “target benefit” rather than a classic guaranteed defined benefit. This should be phased in with a safety valve to cut back on the pension promise if underlying investments don’t pan out. “If the global experience the past few years has shown us anything, it is that rigid define-benefit plans pose too much risk, both for corporations and for governments.”
Mr. Vettese says reform proposals often assume extra years gained by longevity breakthroughs go to retirement, but “we need to spend at least some of our extra longevity working.” Also, he warns, employers may pare back their pensions so the total payout from all sources remains the same. At the same time, labour will want to keep any gains from expanding CPP but oppose offsetting reductions in employer pensions.
Unlike the current CPP, Mr. Horner’s plan would be fully funded, have tax-deductible contributions and reduce RRSP room for participants, as do registered pension plans, Mr. Hamilton says. “It may ultimately be described as the ‘second tier’ of the CPP but conceptually it will be quite different.”
In an interview, Mr. Horner admits things won’t change overnight. His plan isn’t a panacea for aging Baby Boomers who lack pensions and failed to save in RRSPs. It may improve things for tail-end Boomers born in the early 1960s, but would mostly benefit the younger generation that followed.
CARP director of advocacy Susan Eng says doubling CPP could be a problem if money directed to extra contributions kills jobs or makes it harder for families to pay off mortgages. But current maximum CPP premiums are modest and “increases would be less since they will not cover disability or spouse [survivor] pensions.”
CPP is universal and predictable, but a supplement is needed to generate adequate retirement income. Ms. Eng would like to see top-flight pension managers administer PRPPs, with target benefits “as close to DB as you can get when you don’t require employers to participate.”
Mr. Horner sees PRPPs falling between voluntary and mandatory defined contribution pensions, the two main alternatives his report considers. PRPPs “may be a little more than voluntary, but I don’t think the federal government can do automatic enrollment. The provinces might be able to.”
He worries about high investment costs since financial institutions would be involved in PRPPs. They could however coexist with his DB plan. “They’re not mutually exclusive,” he says.
While declining pension coverage puts more onus on individual saving through RRSPs or group RRSPs, the report’s appendix contains a surprising attack on tax-free savings accounts. Mr. Horner frets TFSAs will allow middleincome seniors to pay little income tax while collecting the Guaranteed Income Supplement, eventually crippling Ottawa’s finances.
Mr. Hamilton is less enthused about this aspect. Mr. Horner “views a mandatory DB plan forcing the working poor to save money that will ultimately reduce their GIS benefits as a good thing,” Mr. Hamilton said. “The government would profit handsomely by forcing the working poor to contribute to an expanded CPP and then denying them (through the GIS clawback) a reasonable return on their contributions.”
Mr. Hamilton would rather see CPP expansion restricted to those earning over $20,000. “Those who earn less don’t need to, and cannot afford to, save more for retirement.”
Consultant Keith Ambachtsheer agrees if additional contributions go through TFSAs, rising GIS costs would hurt Canada’s fiscal stability 30 years from now. That’s why Mr. Horner favours the mandatory DB option, Mr. Ambachtsheer explains: “It produces taxable income down the road, thus reducing GIS eligibility.”
Keywords: CPP, pension reform