This article was published by expert pension commentator Leo Kolivakis via his excellent blog Pension Pulse on May 6th, 2013. To see this article and other related articles on the Pension Pulse website, please click here
Late last year, federal and provincial finance ministers met to discuss plans to expand the Canada and Quebec Pension Plans (CPP and QPP). This discussion was largely lost in the pre-Christmas buzz, but holds massive implications for entrepreneurs and working Canadians.
Of course, the concept of CPP expansion has been widely discussed in media stories and columns, typically with the focus on the need to force Canadians to save for their own retirements and the benefit of the low administrative costs associated with CPP. While entrepreneurs support the current CPP model, they are deeply concerned about the costs associated with any expansion of benefits.
Last week, CFIB issued an update of its Forced Savings report, which originally looked at the impact of an expanded CPP/QPP in 2010. The latest report examines the so-called 10-10-10 proposal for CPP/QPP expansion. This plan would hike CPP benefits by 10 percentage points from 25% to 35% of maximum pensionable earnings (MPE), raise the MPE by $10,000 from today’s $51,100 to $61,100, and implement all of this within 10 years.
Although this proposal contemplates a more modest increase than what the Canadian Labour Congress proposed in 2010 — which called for a doubling of benefits — the costs would be substantial nonetheless.
- Employees would pay up to $1,100 more a year in premiums.
- Employers would pay up to $1,100 more a year, per employee.
- The self-employed would pay up to $2,200 more a year (they must pay both shares of CPP).
- Higher labour costs would lead to 700,000 person years of lost work.
- Overall wages would be forced down by 1.5%.
- Federal and provincial governments’ debt-to-GDP ratios would increase by 2% and 1.2%, respectively.
These should be major concerns for all working Canadians and the businesses, non-profit or government that employs them. While all of us would love to retire with additional CPP/QPP benefits, we need to look a lot deeper.
For instance, with the 10-10-10 plan signing us all up for 10 straight years of CPP hikes, we can all expect a drop in our take-home income on Jan. 1 of each year. And I wouldn’t count on your employer giving you a raise to offset the added CPP costs. Many will struggle to cover off the increase in their share of CPP costs. And, of course, hardest hit of all will be the self-employed as they already pay double the amount of everyone else.
On top of that, we should really question how much benefit we will receive should CPP/QPP rates go up. Even the Canadian Labour Congress, which is one of the big unions pushing for this kind of change, admitted the full benefits of an increase wouldn’t take effect for 40 years. That means many people currently working will never see the full benefits of this annual tax hit. For small businesses struggling through a fragile economy, it would increase payroll costs and cause some to cut staff, others to reduce work hours.
The question of who would support such a move was one we puzzled over. After all, it’s largely been public sector unions calling for a CPP/QPP hike, and because of the way public sector pensions are calculated, if CPP/QPP went up, public sector workers wouldn’t get any more money. The real motivation can be found in the massive unfunded liabilities that exist in several public sector pension plans across the country. A CPP/QPP hike would actually reduce government’s pension liabilities, masking the problem of overly generous plans. Keeping CPP expansion in the news helps government unions divert attention away from their own gold-plated plans.
Unfortunately, government unions have been quite successful in getting provincial finance ministers to do their bidding. Most are calling for a CPP expansion and, with a meeting around the corner, CFIB is working hard to let ministers know that small business owners are overwhelmingly opposed to any mandatory expansion in CPP benefits.
To this end, CFIB has launched a web campaign, titled All signs point to trouble, to educate Canadians about this issue. You can calculate the potential cost to yourself, and express your opinion through an online petition. Go to cfib.ca for more information.
The provinces are pushing the federal government toward a decision on this issue at a meeting of finance ministers in June. But ordinary Canadians hold the cards. If they stay silent, it is very possible provincial finance ministers will support a hike. But if they make it clear to provincial decision-makers they won’t stand for a self-serving cash grab, we can stop this ill-advised idea from becoming reality.
Dan Kelly and the CFIB should be ashamed of scaring Canadians into believing that expanding C/QPP will bring about economic hardship and no benefits whatsoever. Worse still, he propagates the myth that public sector unions are behind this push to expand C/QPP to deflect attention from their underfunded plans. This is silly and just feeds into misguided pension envy.
Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), shared these insights with me:
There is an important point that I would add with regard to the expansion of CPP. I wouldn’t necessarily be an advocate of simply expanding the existing system. A supplemental system similar to the supplemental systems in some of the Scandinavian countries could be a better solution. I would acknowledge that expansion of the current CPP offering may be the most pragmatic solution. But doing nothing is not an option.
The arguments being put forward by the CFIB are very short sighted and in my view, doing nothing is not a viable option. The consequences of doing nothing will be very negative and much more costly in the long run. There is a major problem looming on the horizon which is the large number of private sector workers who are not currently members of any pension scheme. These people will not have sufficient savings to meet their living expenses in retirement and will become reliant on the social welfare system. One of the prized values of our Canadian society is our social welfare system and none of us want to see our Canadian senior citizens living in poverty. The large number of Canadians not covered by pension schemes coming into retirement in the next few years will create a huge strain on the social welfare system, and the cost of that will be much higher in the long run than the cost of dealing with the problem today.
In most pension plans only a small portion of the benefits that are paid out come from contributions. The majority of the benefits are paid out of investment income earned over the life of the fund, so typically only about 10% to 15% of the cost is borne by taxpayers. In contrast, if retirees are dependent on the social welfare system, 100% of the cost is borne by taxpayers.
Increasing payroll taxes may have a short-term, one time dampening effect on the economy, but the long term consequences of not dealing with the problem will be much more costly. It is definitely a case of “You can pay me now, or you can pay me later”, but the cost of paying later will be much much higher.
There is no doubt that expanding the C/QPP will involve raising contributions from employees and employers but they will be phased in over many years. More importantly, there is a huge cost of doing nothing, allowing more Canadians to slip through the cracks, falling into pension poverty. Many of CFIB’s members have no pension coverage whatsoever. I’d be curious to learn why they would oppose a policy that would allow them to enjoy a more secure retirement. Again, I suspect they were misinformed or scared silly into believing that expanding the C/QPP is bad news.
Mark Janson, a pension activist and researcher with CUPE, wrote an excellent article for rabble.ca, Top 10 reasons it’s time to expand the Canada Pension Plan:
This June, Finance Ministers from across Canada will meet to decide whether or not to expand the Canada Pension Plan (CPP). An overwhelming majority of the Canadian public support CPP expansion, as does an ever-growing body of seniors’ groups, pension experts, academics and even financial industry leaders.
The Canadian Labour Congress (CLC) plan would gradually phase-in a doubling of CPP benefits, which currently provide retirees with a maximum of about $1,000 per month (though the average retiree receives just over $500 per month). The CLC plan would see these amounts double.
CPP expansion is an efficient, well supported, affordable and much-needed way to ensure that all workers can retire with dignity and security. Here are ten reasons why expanding the CPP is the best way to ensure retirement security for all Canadians.
1) Expanding CPP would benefit all workers. As participation in the CPP is virtually universal, private sector, public sector, unionized and non-unionized workers would all benefit from an expanded CPP. However, the workers who would benefit most from CPP expansion are the two in three Canadian workers (more than 11 million in total) who currently lack a workplace pension plan.
2) Canadians are unable to save enough for retirement in our current system. Fewer than one in four Canadian tax filers contributed to an RRSP last year. Membership in good workplace pension plans has been on the decline for decades. Study after study shows that most Canadians cannot save enough for a decent retirement. A recent CIBC study demonstrated that this problem will worsen as each future generation of workers enters retirement. Expanding the CPP would ensure that Canadians have a better chance for a dignified and secure retirement.
3) CPP provides the security of a defined benefit pension plan. The risk-pooling and defined benefit characteristics of a large pension plan like the CPP ensures that individual retirees will know the amount of their monthly retirement pension in advance. This relieves individuals from having their quality of life in retirement tied entirely to the ups and downs of the market. Within the CPP, investment decisions and risk tolerance assessments can be made by qualified investment professionals, relieving Canadian workers from having to make these difficult decisions. CPP benefits are also fully indexed, so your purchasing power will be preserved throughout your retirement.
4) CPP benefits are portable across jobs and provinces. With CPP lifetime contributions all flow into one CPP payment (or benefit), even across a career of different jobs in different jurisdictions in Canada. With an increasingly mobile labour market, the importance of portable public pension plans like this will only grow.
5) CPP expansion would further reduce poverty among seniors, which would relieve pressure on the public purse. Too many Canadian seniors are living under or near the poverty line. One in three Canadian seniors currently receives payments from the Guaranteed Income Supplement (GIS) – the means-tested federal pension only available to low-income seniors. This program will cost the federal government nearly $10 billion this year alone. Allowing Canadian workers to save more for their own retirements through CPP expansion would relieve fiscal pressure from this federal program and similar programs at the provincial and municipal levels.
6) Low management expenses for CPP mean more of your hard-earned pension contributions will be used to fund your retirement. Canadians pay some of the highest mutual fund fees in the world. Over the years, these high fees mean a significant portion of your potential retirement nest egg is going to banks and money managers. The CPP’s extremely low fees ensure that your CPP contributions will be more efficiently used to fund your retirement.
7) CPP expansion is affordable and will bring economic benefits. Some business groups and right-wing think tanks argue that we cannot afford to expand CPP, citing potential negative impact on employers. However, the last time CPP contribution rates were increased, in the late 1990s and early 2000s, the national unemployment rate actually fell. The contribution increase needed to fund a full doubling of CPP benefits is modest and affordable and would be phased-in gradually, leaving workers and employers ample time to adjust. The Finance Ministers’ own research is clear that CPP expansion will bring long-term economic benefits to Canada, as retirees would have more money to spend in our economy.
8) A few short years after the financial crisis, the CPP remains entirely sustainable. Though Finance Minister, Jim Flaherty is blocking CPP expansion, even he can’t deny that is fully sustainable. Federal pension actuaries, the OECD and numerous pension experts all say the same thing. The CPP has weathered the financial crisis, has a $173 billion investment fund, and is projected to be able to fully meet its obligations over a long 75 year projection period. Any expansion of CPP would be fully pre-funded by increased contributions before the expanded benefits begin to be paid out, ensuring ongoing sustainability of the CPP.
9) Canada’s public pension system is modest by OECD standards. We currently pay much less into our public pensions than most OECD countries and our public pension system replaces less pre-retirement income in retirement as well. A modest expansion would bring Canada more in line with other advanced countries.
10) Canadians want an expanded CPP. Polling data shows that 75 per cent of Canadians support CPP expansion, even when they are presented with figures on the increased contributions required from them to double CPP benefits. Eight in ten provincial governments have indicated they are supportive of CPP expansion. Despite these high levels of public support, several provincial governments are yet to commit to expansion and the federal government has hinted at additional, unnecessary roadblocks it may introduce in the way of CPP expansion. These governments stop obstructing and should listen to Canadians by implementing CPP expansion without delay.
Please let your provincial Finance Minister know you support CPP expansion. Visit cupe.ca/pensions to get involved!
I would add another reason for expanding C/QPP. It is time we realize the benefits of having a CPPIB, a Caisse and other large public pension funds and plans managing the retirement security of millions of people. These organizations are managed by professional pension fund managers who can bring assets internally, lower fees and invest in public and private markets around the world using the best external managers when needed.
Think many Canadians are misinformed about an expanded CPP and they should take the time to look at the Canada Pension Plan Investment Board’s website to understand how their contributions are being managed. In particular, pay attention to all their news releases, see where they are investing directly and indirectly using world class partners in private equity, public markets and real estate.
I truly hope when finance ministers gather in June they will finally take the steps to expand the Canada Pension Plan, realizing that the time has come to bolster our retirement system. Importantly, we need to bring everyone up to the gold-standard of pensions, not scare them into believing C/QPP expansion will detract from their standard of living. Quite the opposite, it will help millions retire in dignity and security.
Below, Matt Miller looks at Norway’s pension fund returns on Bloomberg Television’s “Street Smart.” We’re not Norway but we have what it takes to significantly improve our retirement system. All it takes is some political push and common sense to prevail.