Many argue that Canadian pension programs need to be enhanced using the Canadian Pension Plan (CPP). Some contend that government paid retirement income should be sufficient to replace Canadians’ accustomed pre-retirement living standards while others argue it should simply be more inclusive since many people don’t quality for the CPP. Is expanding the CPP the best approach or are there other, more effective ways to achieve the objective of enhancing pension programs?
CPP holds $234 billion in assets and has been effective in managing both investments and costs. While this is a Canadian success story, there are key questions as to whether Canadians are comfortable, and whether it is prudent, to have so much financial and investment control in the hands of one organization? As the amount of CPP investments increases it also becomes more complicated, risky and costly to earn high returns.
A first step should be to clarify whether the objective behind CPP expansion is to simply increase the number of people that qualify (i.e. receive retirement income) or to improve CPP benefits for Canadians who would already qualify now or in the future.
At this point the intent is not clear.
Paul Owens, Deputy Superintendent of Pensions, Albert came to the conclusion that CPP, OAS and GIS are not sufficient to retire comfortably. This is not surprizing since the average CPP payout is about $550 per month. CPP benefits are already adjusted every January based on increases in the cost of living as measured by the Consumer Price Index (CPI). The underlying issue may be that the current levels of CPP benefits are too low and need to be increased. Or it could be that the incomes of middle class working Canadians retiring in the future will not be adequate.
The advocates for CPP expansion propose that benefit improvements be self-funded and paid for by gradually increasing CPP premiums. No matter how you frame this, it’s a tax increase, which adds to the disposable income problems already experienced by many Canadians. Someone has to pay for the benefit increases regardless of the delivery vehicle and the argument of a “free lunch” from investing has limitations.
An increase in CPP premiums represents a cash cost for both employers and employees. How will higher CPP premiums affect business cash flow and competitiveness? The reduction in disposable income for employees could result in lower contributions to DC plans, DPSPs, PRPPs, RRSPs or TFSAs and RESPs. Is this desirable or an unintended consequence?
Another unanswered question is what the amount of the additional CPP benefits will be and when they will be paid. The retirement date for CPP (and OAS) is being pushed out to age 67 so benefits will be delayed in any case. Increased CPP will also reduce GIS and OAS payments for some people. In many cases higher CPP benefits would also result in more tax payable in the future. What appears to be missing is an indication of what the annual cash cost will be for employees and employers.
A key piece of missing information is what the value of the future net cash flow will be for the average Canadian (i.e. the net present value of the enhanced CPP benefit associated with higher CPP premiums). Higher CCP premiums and benefits are a form of non-discretionary forced savings — a paternalistic approach which many people may resent.
The questions continue. Who are the target beneficiaries of CPP expansion? Is the current CPP inflation adjustment process an underlying part of the problem that needs to be improved? How will the federal and provincial governments recoup the tax revenue lost from higher CPP premiums (i.e. who pays?)
There are many unanswered questions regarding the impact of higher CPP premiums and benefits. Former New York City Mayor, Michael Bloomberg, best described this type of situation when he said, “In God we trust. Everyone else, bring data”.
Depending on the objectives, an alternative to CPP expansion might be to expand the OAS system. OAS is available (with minor exceptions) to all Canadians, it’s fairly straight forward, and the claw back feature allows recipient-income targeting. OAS is paid out of general revenues and is a major annual federal government expense. Why not a straightforward, transparent approach? Determine and publicize the annual cost of increased benefits, use OAS as the vehicle, and pay for them on an annual cash basis by dedicating a specific percent increase in GST to paying for OAS. This has several advantages: benefits could be targeted and limited, costs would be transparent and Canadians would know what the additional GST was for.
There appears to be a consensus and pressure on the federal government to improve CPP. Ontario is proceeding with its own mandatory provincial pension plan to complement CPP. However, the CLC want CPP benefits to be significantly higher and intend to make this a federal election issue. According to the CLC, a worker earning $47,200 per year can double future lifetime CPP benefits by paying an additional CPP premium of $3.57 per week ($186 per year) for seven years. This would be wonderful, but it almost seems too good to be true. Perhaps a simpler approach would be for CPP to sponsor a PRPP open to all Canadians.
Since working Canadians will pay for any increase, they need to have a clearer understanding of the objectives and assumptions, and more information on the costs and benefits about improvements in the CPP. Again, before focusing on which vehicle is best suited to delivering pension enhancements let’s get the additional information needed for an informed honest debate on the issues rather than asking Canadians to buy into “a pig in poke”.