Australia: Model for CPP Fix?

807208_kangaroo_signAs Canada contemplates whether or not to expand its public pension system, it can learn from the experience of Australia, which has managed to increase pension coverage while reducing public pension spending.

This is the argument of a new study—Policy Reforms in Australia and What They Mean for Canada—by the Fraser Institute.

“The Australian government began significant pension reform in the 1990s, and now the Australian pension system is frequently cited by experts as among the best in the world,” says one of the report’s authors, Sean Speer, associate director of fiscal studies at the Fraser Institute.

Australia has no equivalent of the Canada Pension Plan (CPP), but it does provide a basic government pension, which serves as a safety net similar to Canada’s old age security program. It phases out as an individual’s earnings increase. Australia also requires companies to contribute to retirement savings accounts for their employees and offer tax incentives for voluntary contributions by individuals. About 90% of the country’s workers have these private pension accounts.

“Australia’s approach to retirement savings, which—unlike the Canadian system—requires private savings rather than public savings, has served Australia well,” Speer says. “Since Canada and Australia share a similar history, culture and economy, Canadian policy-makers should consider the pension system in Australia before making any changes to the CPP.”

Canada is currently debating whether to increase the size of CPP benefits, which now pay about $500 a month, on average, through higher contributions.

Those in favour of CPP expansion argue that it is the only way to provide retirement income security for all Canadians, particularly the millions who have no access to company pension plans. But critics of expansion say employers and individuals, who make equal CPP contributions, cannot afford this, especially since the country still finds itself in an anemic economic environment.

At a meeting later this month, the federal, provincial and territorial finance ministers will discuss CPP expansion.

Changing the size of CPP benefits requires the approval of at least seven provinces—and those seven provinces combined need to represent two-thirds of the country’s population.

More than half of Canadians want CPP contributions increased so benefits can be higher, while 34% oppose the idea, according to a recent poll by the Canadian Association of Retired Persons. The poll shows that support for CPP expansion is highest among those 65 and older (67%).

In addition to Australia’s pension reform, the Fraser Institute study also focuses on the country’s fiscal and labour reforms, geared toward improving public finances. Australia embarked on budget balancing in 1996. During this period of changes, the country’s unemployment rate fell to 4% in 2008 from 11.2% in 1992.