What’s your Problem with CPP/QPP Expansion ?

Pension fund management, consultancy and private pension savings management is big business.  There is no doubt that CPP/QPP expansion would be much less advantageous than PRPPs for private wealth management and pension fund managers.  This has resulted in huge industry push back against the idea and if CARP were to go about addressing all of the detractors we would get no other work done.

In order to refute some of the most common objections against CPP/QPP increase – we’ve chosen the best version of the argument on the opposing side.   After all, the best way to show the merits of our case is to confront the best available being made to oppose our policy proposal.  Hit us with your best shot – we can take it!

On January 26th, 2013 – Morneau Shepell chief actuary Fred Vettese (who is also the co-author of a book titled “The Real Retirement, Why You Could be Better Off Than You Think and How to Make that Happen”) published an Op-Ed in the Financial Post entitled “Five Reasons to go Slow on CPP/QPP expansion”.

We will examine the arguments made by Mr. Vattese and present our counter arguments.  We’ve enlisted two of our resident pension experts to provide extra input and expertise on these issues.  They are Bernard Dussault, pension expert and Former Chief Actuary of the Canada Pension Plan as well as pension expert and “Pension Pulse” publisher Leo Kolivakis.  Mr. Kolivakis has also published an article containing his own Feedback as well as Bernard’s.

Kolivakis makes an excellent point: “Whenever I read op-ed articles by pension experts warning us to “go slow” on C/QPP expansion, I ask myself what’s their angle and why are they failing to see that we’ve dragged our feet on C/QPP expansion for far too long?”

For the sake of context, we should point out that Mr. Vettese’s employer, Morneau Shepell is amongst other things, one of Canada’s largest private pension and benefits administrators and that the book that Vettese co-authored is billed as a “a new book that destroys popular myths about retirement myths in Canada”.

Something about CARP’s pro-CPP increase policy that seems to baffle many observers is why we would support a measure that many of our members won’t necessarily benefit from.  They want to know: what’s our angle?

The answer seems to mystify people: our “angle” is that CARP members have perspective to offer on retirement – given they are living it and given that they had to deal with the consequences of the 2008 stock collapse.  They would like the next generation to benefit from the knowledge they wish they had – CARP’s “angle” in this matter can be summarized in one world: altruism.

Let’s get down to the business of examining the case against CPP increase, as laid out by Fred Vettese – his points will be featured in bold and Mr. Kolivakis, Mr. Dussault and CARP’s counterpoints will be featured in italics:

1)   Fred Vettese: We don’t have a retirement crisis in spite of perceptions to the contrary, and none will develop for many years to come. The poverty rate among seniors is very low in absolute terms, less than half that of Canadians aged 18-64. An expanded C/QPP therefore starts to resemble a solution looking for a problem. The news is better than most of us realize. Nearly half of recent retirees have enough retirement income to replace more than 115% of their regular pre-retirement consumption.

Bernard Dussault points out that a crisis is actually defined as temporary acute condition. In that sense there is a dying retirement crisis that started with the large investment losses incurred by pension funds in 2008.  As 35% of Canadian seniors do steadily rely on the GIS and have annual income in the range of $14,000 to $18,000, there is a chronic problem with the Canadian pension system that can be addressed only by compelling Canadian workers to save through the CPP.  Even if Mr. Vettese were right in saying that 50% of retirees have enough for retirement should we then discount the other half?

Kolivakis points out that the notion that there is no pension crisis just might be the biggest pension myth in circulation “When 20% of the population earns $15,000 a year or less — basically poverty line — and most people are struggling to make their rent, mortgage payments and cover their basic expenses, I find it hard to believe that “nearly half of recent retirees have enough retirement income to replace more than 115% of their regular pre-retirement consumption.”

 CARP has consistently argued that given the fact that 1.6 million seniors are forced to rely on the GIS and are therefore living on an average of $16, 000 a year (Well below the Low-Income Cut-Offs for more cities) – there is actually quite a high incidence of poverty among seniors and what’s more – those seniors, for the most part, cannot change their circumstance by earning additional income.

Approximately 8 million working Canadians have no workplace pension plan, of whom 3.5 million are middle-income earners and 4.9 million earn less than $30,000 per year. These are the people who need a supplementary pension plan, something that encourages them to save for their own retirement in an affordable and reliable manner.  Click here to read more of CARP’s work to reform the Canadian retirement income system.

2)   Fred Vettese: The real looming problem in Canada is the rising cost of health care. We are already paying about $200-billion a year for health care and that is expected to rise by another 50% in real terms over the next 20 years. This is a serious problem because it will crowd out program spending for education and pensions. The rising healthcare bill will inevitably lead to higher taxes or user fees. Before we decide we’re ready to absorb higher C/QPP costs we should look more closely at where health costs are likely to end up.

This is a false dichotomy –  C/QPP costs are not borne by taxes, they are funded by employer and employee contributions. Besides, it assumes that we keep doing everything in the same way and that we don’t employ any of the healthcare reform policy proposals that will allow us to rein in wasteful healthcare spending and realize cost-savings.  CARP has outlined many proposals in the healthcare area that would not only help deliver better care but realize significant savings.  Click here to CARP’s streamlined, improved and cost-saving healthcare delivery proposals.

Additionally – a modest CPP expansion, e.g. increasing the pension rate from 25% to 35% would only cost about 2% of salary.  On the lower end of the income spectrum increase in pension income has been tied to significantly better health outcomes and therefore, the resulting higher pension income would put Canadian seniors in a position to better care for their health, take preventative measures and assume part of the costs themselves if worst comes to worse. 

Saying that we should go slow on CPP because we face increased taxes is misleading and disingenuous because it fails to recognize that pension poverty looms large and will swamp out social welfare costs and substantially add to escalating healthcare costs.  Finally, at the end of the day, the CPP is fully funded and not levied from tax revenues so we’re also talking apples and bananas. 

3)   Fred Vettese: We risk phasing in any improvements to the Canada/Quebec Pension Plan too quickly. This is what we did in 1966 when we provided a full C/QPP benefit after only 10 years of contributing a miniscule 3.6% of covered earnings and we are still paying the price today. The long-term cost of the Canada Pension Plan today is about 9.9% of covered earnings (it is about 11.2% in Quebec) though it should be closer to 6%. We are paying so much more because the previous generation didn’t pay enough into the C/QPP in its early years, leaving an unfunded liability that has to be amortized. 
If labour had its way, we would do the same thing again. The Canadian Labour Congress proposes a “small premium increase” to phase in a doubling of the CPP in just seven years. The fact is, the required contributions — employer and employee combined — would eventually have to climb to at least 16% of pay and possibly to over 20% if this doubling of the CPP is implemented retroactively. The quicker the phase-in the higher the ultimate cost. The situation is worse than it was in 1966-1976 because this time the 55-65 age group is so much larger. Quick phase-in means the next generation will be paying much more for their expanded C/QPP pension than it is worth. As if young people didn’t have enough reasons to resent the older generation!

We needed C/QPP expansion for far too long ago... We can phase it in over years but the reality is the sooner we do it, the better off our citizens will be in their retirement.  The truth is that we needed pension reform yesterday not in some far off distant future.  Just ask the retirees who lost half their savings during the crash if they could have benefited from more stable/less volatile asset management like the one offered by the CPPIB. 

Mainly though – this argument perhaps the most misleading because it relies on a “worst case scenario” that would be legally impossible.  As Dussault points out  “by virtue of a recent amendment to the CPP, all eventual improvements to the CPP shall be fully funded. And they will. Full funding means no possible phasing-in whatsoever.”

4)   Fred Vettese: An expanded CPP would enable us to continue to retire fairly early — the current average retirement age is 62 — and maybe even earlier. While this seems like a good thing, the worker to retiree ratio is dropping and will eventually fall from the present 4.4 to 1 to an estimated 2.3 to 1 by 2036. As this happens, we will need the 60-somethings to stay in the workforce longer to slow down this falling ratio. If we expand the C/QPP now so we can continue to retire early, employers and governments down the road will have find ways to reverse the effect in order to entice Canadians to do just the opposite. This is not exactly the most efficient strategy.

There is absolutely no indication that increasing CPP would be conducive to early retirement – no evidence whatsoever.  The Marginal pension provided by the CPP (about $12K/per year at the moment) has not been shown to have an impact on age of retirement – the biggest factors that lead to early retirement are inability to continue working and being forced out of work (mandatory retirement).  Bernard Dussault also says that the availability of CPP is not synonymous for retirement, his findings have shown that many people continue to work and contribute to the CPP well past the age of eligibility if they are in a position to do so.    Mr. Vettese is right to be concerned with the looming skilled worker shortages but he wants to help on this front, he should join CARP in campaigning to put an end to mandatory retirement everywhere and to create better working conditions for older workers.

5)   Fred Vettese: Fifth, expanding the C/QPP means we will be putting much more emphasis on just one pillar in our 3-pillar retirement system. One of the strengths of our current system (which ranks very highly internationally) is that Canadians get their retirement security from multiple sources. Indeed, we are praised by the OECD for the diversity of our sources of retirement income. An expanded C/QPP would induce us to contribute less to RRSPs and pension plans and increase our reliance on the government to provide for our retirement needs. This reliance is a little precarious. While we weathered the recent financial crisis much better than most countries, who is to say we won’t look more like Greece in 20 years?

Again, Vettese is comparing apples and bananas, the major problem is Greece was excessive national debt.  The CPP is a distinct, fully funded, stand-alone program that has no bearings or relationship to the Federal budget.  Its benefits are only paid to the extent that the funds are available. 

Dussault also points out: “the OECD considers that the Netherlands has best retirement system in the world.  They have no comparable multiplicity – they do not have a pillared retirement system.  The great majority of pension income is generated by a single private mandatory occupational pension system.  In any event, any reduction in the role of RRSPs in the Canadian pension system is not relevant because RRSPs do not essentially generate much retirement income.  The vast majority of RRSP accounts are withdrawn and used before retirement.

Kolivakis concludes with the following:  Fifth, and most importantly, expanding C/QPP means we will finally recognize the superiority of having our pensions managed by large, well governed public pension funds.

People need to understand that over the long-term, their pension savings are better managed by professional pension fund managers who can invest across public and private markets, investing or co-investing with the best managers in the world. In short, RRSPs, PRPPs, and other defined-contribution solutions just don’t cut it  as they leave people vulnerable to the vagaries of the market. When it comes to improving our retirement system, we need to bolster our defined-benefit plans.