The problem with an Ontario pension plan

Last month, the Ontario government presented its budget that included the Ontario Retirement Pension Plan (ORPP). I don’t have all the details, not because I didn’t look, but because the leaders in our government don’t have all the details to offer at this stage. Apparently it is their strategy is to tell you they are doing something and then leave some room to figure out the details later. Sadly, I wish they figured out how ill-conceived this idea is before releasing details of the plan. (An ORPP is contingent on the Liberals being re-elected on Thursday since the Conservatives and NDP have publicly said that they don’t support the proposal).

I guess the Liberal government thought that it had no choice but to go this route after so publicly pushing the federal government and other provinces to get on board with a CPP expansion and playing the ‘if you don’t do it with us we will do it on our own’ card. I can’t believe that the Liberals can’t find a single soul in the federal Department of Finance that can help them understand how complicated this thing is going to be.

The implication is that the ORPP will be just like the CPP except:

  • Employee contributions will be 1.9% of earnings up to a maximum of $90,000
  • Employers will be required to make a matching 1.9% contribution
  • The self-employed may not be required to join
  • Workers with a ‘comparable’ workplace pension plan will not be required to join
  • Not all employers will join together; larger employers will join first followed by smaller employers later

The problems with the ORPP mirror the problems that would come with an expanded CPP:

  • Funding a DB plan means you need to set a benefit level and guess at a contribution rate. If the contribution rate is inadequate, the next generation of workers has to over-pay to compensate for the under-contribution by the generation ahead.
  • Additional savings of 3.8% will be meaningful to those retiring in 30 or 40 years but will do little for those retiring in the next decade—especially when the program doesn’t even start until 2017.
  • The CPP/ORPP are social programs and not pension plans—there will be winners and losers in the cross-subsidization game. My fear is that the losers will continue to be the low-income workers that are often in poorer health and have inconsistent earnings and the winners will be those that are well educated, well paid, and already looking forward to a healthy and long retirement.
  • There is a risk—not a guarantee but a risk—that pulling these dollars from consumers and businesses might stall an already fragile economic recovery in Ontario.

But before you say no to this proposal, there are more problems that are unique to Ontario’s super special go-it-alone strategy:

  • There is absolutely no leverage of the CPP infrastructure to receive contributions, invest funds, or calculate and pay benefits. The CPP spends more than $600 million in operating expenses. How much will Ontario spend to run its mini-CPP?
  • The flat employee contribution rate of 1.9% of pay likely means that you are taking valuable take-home pay from minimum wage workers that may not need more retirement income nearly as much as they need more dollars to pay their ever-increasing hydro bills.
  • It won’t be universal. Some employers and their employees will be in and some will be out so figuring out what you get when you retire will be a little less difficult than solving the Rubik’s Cube. What is really frustrating about this feature is that level contributions in a DB plan only work if employees stay in the plan for a lifetime—otherwise younger workers always subsidize older workers. I can’t wait to see who they pick for chief actuary or the assumptions that he or she makes to justify the wonderful benefits promised for the low, low, price of 3.8% of pay.
  • Small employers, those that are least likely to already offer any sort of pension are the last to join—if they ever join at all. Maybe this compromise was intended to satisfy the Canadian Federation of Independent Business, but once again we have created the optics of helping people when we really aren’t doing anything for the people who need the help most.

I don’t know what more I can say—someone in the Ontario government is convinced that this is the way to go and either they don’t have anyone around them telling them it isn’t—or they just aren’t listening.

Joe Nunes is president of Actuarial Solutions Inc. The views expressed are those of the author and not necessarily those of Benefits Canada.

Tomorrow, we’ll get labour’s perspective on retirement security.

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