Ontario has been pushing the federal government and other provinces to expand the Canada Pension Plan (CPP) as a way of dealing with, in its view, a massive failure by Ontarians (and, by extension, Canadians) to prepare financially for retirement. Ottawa opposes CPP expansion because enhancements are viewed as “risky,” job destructive and discouraging business expansion.

The July 2014 Ontario budget reintroduced provisions of the May budget, which proposed creation of an Ontario Retirement Pension Plan (ORPP). Presumably, this was done as a means of pressuring the federal government to enhance CPP benefits. Armed with a new majority government, it appears that an emboldened Premier Kathleen Wynne will use her new mandate to push the ORPP proposal in the hopes of Ottawa’s capitulation. It’s unclear if this strategy will work. If the federal government remains inflexible, should British Columbia consider creating the B.C. Retirement Pension Plan (BCRPP)?

The budget documents provided scant details, but the following is an outline of the ORPP:

  • It’s designed to replace 15% of employee income up to $90,000.
  • Employees will contribute 1.9% of earnings up to $90,000.
  • Employers will contribute a matching 1.9% of earnings.
  • Self-employed persons will contribute 3.8%, but participation is likely not mandatory.
  • Employees with comparable workplace pension plans need not join.
  • Employees in federally regulated industries need not join.
  • It will be introduced in stages starting in 2017, beginning with the largest employers.
  • An independent board would oversee investment of ORPP contributions.

Three case studies that supplemented the budget documents illustrate, in 2014 dollars, the ORPP benefits generated each year assuming 40 years of employment and retirement at age 65:

  • A worker earning $45,000 would collect $6,410 annually ($534/month).
  • A worker earning $70,000 would collect $9,970 annually ($831/month).
  • A worker earning $90,000 would collect $12,815 annually ($1,068/month).

British Columbia is one of a number of Canadian provinces and territories that are “in talks” with Ontario about the lack of progress in efforts to enhance CPP benefits. It will be watching the development of the proposed ORPP carefully. If CPP expansion remains a non-starter and the ORPP is launched successfully, Victoria may explore its own made-in-B.C. solution. Or it could join the ORPP.

A BCRPP would represent a form of forced savings for British Columbian employees, which, based on experience with the CPP, is not necessarily a bad thing. Whether employers can absorb an additional 1.9% payroll tax is a different issue. However, there are many other issues for British Columbians to consider before jumping on the proverbial bandwagon. For example, will the 3.8% contribution rate be sufficient to provide the promised benefits and will older employees in fact benefit from a BCRPP?

Recent experience with the CPP suggests that, when these types of benefits are established, the contribution rates are mere guestimates. If they prove to be inadequate, the next generation of workers (and their employers) must overcontribute to cover the shortfall from the previous generation of workers who are, by then, collecting the promised benefits. And, while the case studies that accompanied the budget documents suggest that additional annual savings of 3.8% can deliver significant benefits for those who contribute for 40 years, those additional savings likely deliver minimal benefits for employees nearing retirement.

As suggested in an earlier post, the Canadian retirement system is unproductive and inefficient and requires simplicity, efficiency and uniformity—not new schemes that add complexity and cost to employing workers. It’s hard to see how the ORPP or the BCRPP make their respective retirement systems more productive or efficient. In fact, such go-it-alone plans will likely have the opposite effect (e.g., how will they deal with the hallmark of the CPP–interprovincial mobility?) and, because they necessitate employer matching, these forced savings schemes represent yet another payroll tax, which could cost jobs, especially for lower-income workers.

Furthermore, establishing the infrastructure to operate the ORPP (or BCRPP) will be significant. The CPP spends more than $600 million in annual operating expenses, and it’s been up and running since the mid-1960s.

At a time when the Ontario government is being threatened with credit rating downgrades and is desperately trying to tame its budget deficit, imagine the investment needed just to implement the ORPP (consultants, employees, office space, technology, training, etc.) and, imagine further, the annual operating expenses required to run the program. They will be equally significant.

Beginning in 2017, the ORPP proposal would require two-thirds of working Ontarians who do not have workplace pensions, to contribute to the plan with matching employer contributions.

Following the July budget announcement, members of the Retail Council of Canada expressed concerns about the implications of the ORPP and its impact on economic growth, jobs and investment. Ontario retail employers already pay a substantial employer health tax and, apparently, the second highest Workplace Safety and Insurance Board premiums in Canada. Accordingly, additional payroll taxes along the lines of the ORPP could have a detrimental cumulative effect on payroll costs and could diminish the capacity of retailers and other employers in Ontario to hire more workers. No doubt, these same arguments apply to British Columbia employers, which also pay substantial health and Worksafe BC premiums.

Before embarking on this scheme, Ontario and any other interested province, British Columbia included, should consider alternatives. Here are just a few:

  • Determine if Ottawa will agree to a supplemental DC-type pension plan, which will be fully administered and invested through the CPP. Granted, it won’t provide a guaranteed benefit, but the infrastructure and investment expertise is already in place. A well-managed DC plan can provide a reasonable supplemental pension, although the contribution rates will need to rise in order for the DC benefit to come close to the benefit the ORPP is proposing.
  • Determine if Quebec will open the Quebec Pension Plan (QPP) to some sort of supplementary pension plan for non-Quebec employees—the infrastructure and investment expertise is already in place.
  • Gauge the interest among the other provinces for the creation of a Canada-wide supplemental target benefit retirement pension plan. Quebec will likely not be interested because it already has the QPP; however, if the remaining provinces are keen, the risks and costs of establishing and operating the supplemental plan could be shared by a significantly larger pool of employees from across Canada. Perhaps Quebec could be persuaded to allow the QPP infrastructure to be used for the new plan’s administration and investment requirements.
  • Circulate a request for proposal to the Canadian banking and insurance industries to gauge their interest in administering either a provincial or Canada-wide supplemental retirement pension plan. A consortium of financial institutions could form an entity to manage a new retirement plan for a fraction of what it might cost if a single province were to go it alone. The Saskatchewan Pension Plan, for example, targets a 1% management fee to cover all professional and operating expenses for that plan.

While it’s too early to determine whether the ORPP can deliver the promised benefit with the proposed contribution rate, it’s not too early to forecast that implementation and operation costs will be significant. It’s safe to assume that the same applies if British Columbia were to introduce a BCRPP. However, given that those nearing retirement will benefit little from a short-term 3.8% annual contribution, and that there is much uncertainty surrounding costs and the size of the ultimate benefit that can be delivered, British Columbia would be well advised not to rush to join the ORPP or create its own BCRPP.

Rather than a case of the early bird getting the worm, this may be where the second mouse gets the cheese or, at least, avoids the trap. Since the British Columbia government is currently only in the “talking stage” with Ontario, interested employer and employee groups should make their views known to Victoria before it’s too late.

Claude Marchessault is an educator, lawyer and the executive director of the British Columbia Teachers’, College and Public Service pension plans. The views expressed are those of the author and not necessarily those of the pension plans or Benefits Canada.
Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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See all comments Recent Comments

Robert in Vancouver:

Fragmenting the pension system with more provincial plans will take money out of the pension system due to extra administration costs.

There are finite amounts of money available to fund pensions, and everything else. This seems to be impossible for socialists to understand.

Thursday, July 24 at 12:16 pm | Reply

AJM:

funny how there is no money for citizens pensions , but there is all types of money for the politicians own platinum pension plan , its criminal conflict of interest for our elected officials to give themselves a better pension that their electorate .
If they were paying attention over the past 45 years of good economic progress they should have indexed the amounts to be paid properly so that today a claimant could realize a min of $3600 per month not the measley $1200 welare and catfood ration pension offrered becaue of their mismanagement , Politians pensions shou;d all be rolled back to the same levels as the general population !

Thursday, July 24 at 6:22 pm | Reply

AJM:

It would be interesting to see what the pension amounts are payable monthly for our elected officials ..

If the majority cannot live on the pensions offered for 50 years of work , there will be civil unrest …

what were they thinking in creating a pension plan that did not keep up with the cost of living , instead the $$ was pocketed as excess profits and not paid into the public purse … complete incompetence by government management of the CPP , They cannot save themselves by hiving off a chunk for themselves and ignore a problem of improper management of the CPP rates and investments over the past 45 years …society breaks down when there is a perception that some are not paying their fair share and have gotten more than their share ….

Thursday, July 24 at 6:33 pm | Reply

Marilyn:

Well expressed. I think that there should be a BC pension for residents who have lived in BC for longer than 10 years. Quebec offers a pension for its residents, and I think that we should follow suit.

Thursday, September 10 at 7:35 pm | Reply

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