The first phase in implementing the Canada Pension Plan enhancement is looming large. Employee and employer contribution rates will start to increase in 2019 and keep on rising until 2025. While it will take a very long time to phase in, the benefit level under the enhanced CPP will be up to 50 per cent bigger than it is now.
For workers without a pension plan, which means most Canadians in the private sector, the CPP enhancement will be a good thing. Having a larger formal pension means they won’t need to rely as much on their own savings.
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What’s peculiar, however, is what’s happening in the big public sector plans across the country. In a word: nothing, at least not to my knowledge. I’ve been asking around about what steps the public plans are taking so far, and I’ve yet to hear of any firm commitment to integrate the enhanced CPP. (As an aside, integration means cutting back the pension promise under the workplace plan to reflect the bigger pension coming from the CPP. The extent of the cutback under the workplace plan could be dollar for dollar, although partial integration is also possible.)
This isn’t the first time our public sector plans have had to grapple with the controversial issue of CPP integration. They went through the process back in 1965, on the eve of the CPP’s original launch. It didn’t go smoothly back then, either, as many big public sector unions fought bitterly against integration but ultimately adopted it, with few exceptions.
There are at least a couple of reasons why pension plans, especially in the public sector, should be integrating the latest CPP enhancement. For one, those plans already promise gross income replacement ratios of 70 per cent or more for long-service employees. That often translates into net-replacement ratios of 120 per cent or more, meaning the recipients can look forward to a higher standard of living after retirement than they had before. Integration may seem like a cutback, but it’s important to understand that it doesn’t reduce workers’ total pension benefit.
Read: Actuarial report on enhanced CPP contains some interesting tidbits for plan sponsors
Another reason to integrate is to keep current contribution rates in check. The members of public sector plans, together with their employers, are already contributing about 30 per cent of annual pay towards retirement. If they don’t integrate the new CPP, contributions will rise further, which may be a tough sell to both the rank and file, as well as to the general public that has to foot at least half of the bill.
So why haven’t public sector plans integrated the enhancement yet? In fairness, they may not have gotten around to it. There are still nine months to go before it affects anyone. I fear, however, that that’s not the real reason. These are very big plans that usually plan years ahead when they see something coming down the pipe. Is it possible, then, that the lack of action reflects resistance to giving up a significant benefit increase without a fight?
I’ve already heard a couple of public sector representatives rationalizing why they shouldn’t integrate the increased CPP benefit. In one case, the claim was workers need increased non-cash compensation to make up for budget constraints on pay increases. Another argument making the rounds is that employees who will have only 20 years of pensionable service at retirement could use more pension benefits. I will leave it to the reader to assess the merits of those particular arguments.
Of course, integration isn’t entirely a public sector problem. Private sector plans should also be considering what actions they should be taking. It’s less of a problem in the private sector, however, since few plans provide anything close to the maximum allowable pension accrual rate (two per cent of pay per annum) and existing contribution rates are usually much lower than in the public sector.
Read: CPP changes do little to ensure appropriate income for future retirees
It’s unfortunate that the policy-makers who crafted the details of the CPP enhancement didn’t take steps to minimize the inevitable challenges in integrating the enhancement. They could have made at least some integration automatic by choosing an alternative definition of the year’s maximum pensionable earnings and the year’s additional maximum pensionable earnings (this is a highly technical argument but nevertheless significant). Alternatively, the government could have amended the Income Tax Act to limit annual pension accruals to two per cent of best average earnings, including the CPP.
One factor that makes meaningful change difficult is the agency problem: one party (as in management) is expected to act in the best interests of another party (shareholders) but is in a conflict because it may adversely affect the first group’s own entitlements. That’s true not only in the case of management but also the federal government itself. Federal politicians enjoy a pension accrual rate that’s 50 per cent higher than what they allow other Canadians to enjoy and are unlikely to bring attention to that fact by changing the rules as suggested above.
It will be interesting to see how the issue unfolds in the months to come. To get an idea of what to expect, take a look at the newspaper archives from November and December of 1965.