Now that the finance ministers have reached an agreement on Canada Pension Plan expansion, you’d think we could all breathe a sigh of relief and go back to our normal lives. Whether or not you like the compromise reached yesterday in Vancouver, the 10-year national debate on pension reform has finally reached a closure of sorts.
Of course, it’s never quite that simple. The expansion formula announced on Monday will have certain negative repercussions that will take many years to play out.
First, there’s the question of integrating an expanded CPP into existing workplace pension plans. Most people have the sense that integration is a technical detail that will resolve itself in a non-controversial and cost-neutral manner. That’s almost certainly not true.
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Unless governments pass special legislation, CPP expansion can pose a major headache for employers that sponsor workplace pensions, especially when it comes to collectively bargained plans. Consider the controversy that integration presented in the months leading up to the launch of the original CPP. Below is a quote from the Globe and Mail on Dec. 23, 1965, just nine days before the launch of the CPP:
“The CPP is coming upon the country amid a hodgepodge of controversy, uncertainty and widely varying patterns for fitting it into existing retirement schemes.”
Most unions in 1965 preferred to stack the CPP on top of their existing plans instead of integrating them. They regarded the company contribution to their pension plan as an entitlement for which they had fought hard in collective bargaining. As a result, they didn’t want the addition of a new plan to reduce the employer cost under their workplace plan, but that’s what CPP integration does.
In the months leading up to Jan. 1, 1966, many court challenges took place. Much of the acrimony occurred in Ontario, where the government collided with some of the municipal bodies and other public sector organizations. The CPP also affected some national pension plan sponsors, such as the Canadian Pacific Railway and the Canadian National Railway. Ultimately, employers had to offer a variety of concessions in order to achieve integration.
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There’s no reason to think it will be different this time around. Getting the unions to agree to a dollar-for-dollar reduction in their public sector pension plans to accommodate an expanded CPP won’t be easy. The federal and provincial governments could facilitate that if they all passed pension legislation that forces integration, but that would be a heavy-handed action that would require an unprecedented level of interprovincial co-ordination. A more workable solution is for the federal government to change the tax law by making the maximum annual pension accrual two per cent, inclusive of CPP benefits. Even that seems unlikely to happen.
The other thing we can expect is a further contraction of Pillar 3 (which includes both workplace pension plans and registered retirement savings plan savings). Coverage in workplace pension plans rose throughout the 1960s and early 1970s but peaked in 1977 at 46 per cent of the workforce. It then fell gradually over time and today stands at just under 38 per cent. It’s no coincidence that coverage started to decline in the same year that full pensions under the CPP became payable for the first time.
We can expect the same thing to happen now that the CPP has expanded. Coverage may not change much for a number of years, but as the bigger CPP benefit starts to phase in, it will almost certainly drop. It’s a little ironic that many observers felt we needed an expanded CPP because workplace pension coverage had dropped, but in a sense, the reverse happened. Workplace pension coverage dropped because of the introduction of the CPP (and the guaranteed income supplement) and will now decline further.
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While the impact on workplace pension coverage will be slow to take effect, the impact on RRSP contributions will be more immediate. A study by Derek Messacar revealed that voluntary retirement savings drop by as much as $1 for every $2 increase in required contributions to a pension plan. We can expect something similar now that workers will be contributing more to the CPP. RRSP assets in aggregate may actually continue to grow but they’ll grow more slowly than would otherwise have been the case.
What we can expect, then, is that an expanded CPP will create a moral hazard as individual and corporate responsibility for saving for retirement will weaken. Employers with marginal pension plans will no longer feel morally obliged to maintain those plans, and workers will feel they don’t need to save as much.
Nevertheless, an expanded CPP will ultimately prove to be the right call. In the early 1960s, politicians, businesses and even the general public complained loudly about the impending launch of the CPP. They argued it wasn’t necessary, affordable or actuarially sound. Those voices eventually fell silent, and today we find that even the most vehement objectors to CPP expansion will grudgingly admit the current plan serves a useful purpose.
We may therefore be seeing history repeat itself. Despite the problems an expanded CPP will bring, I expect the Canadian public will eventually come to embrace it in much the same way as with the original CPP.