In May, the Conservative government said it will look into allowing Canadians to voluntarily put more of their earnings into the Canada Pension Plan. Announced just before the 2015 federal election, this idea strikes some as merely a marketing campaign. Industry practitioners say even if it comes to pass—and that’s a big if, because it would be difficult to implement — it likely won’t displace contributions to workplace pension plans because employees would have little incentive to voluntarily make extra CPP contributions.
“This is nine parts political, maybe one part substance,” says Paul Moist, national president of the Canadian Union of Public Employees. The Tories didn’t include the idea in the 2015 federal budget, and its timing — five months before the federal election and nine years after they’ve been in office — is suspect, making it look like electioneering, he notes.
Too many unknowns
It’s unclear if employers would have to match employees’ voluntary contributions. In the context of a voluntary expansion, they likely won’t, speculates Alexandre Laurin, director of research at the C.D. Howe Institute.
It’s also unclear how the expansion would happen. Laurin says there are two ways to do it. One is expanding the current defined-benefit-style CPP for those Canadians who want to put in extra money, without allowing them to withdraw their voluntary contributions until they retire. The other is allowing Canadians to voluntarily contribute to individual, RRSP-style CPP accounts.
Laurin says the Tories likely don’t envision the first option as the CPP is a social security program and not a private pension plan, so Canadians would have little incentive to contribute voluntarily. “Social security works great when it’s mandatory,” he explains. “Why would I say, ‘I’m going to put [an extra] two per cent of my income voluntarily, with no employer matching, in the CPP [to get] a bit more CPP benefits in retirement, but I have to wait until I’m 65?’ If I die at 59, I get nothing.”
Laurin believes the Tories likely mean an RRSP-style expansion, with voluntary contributions flowing into the CPP and people getting individual CPP accounts for their extra contributions, with individual reporting on investment returns. But it remains unclear if Canadians would be able to withdraw their money before retirement, the way they can with RRSPs.
That option would be expensive, says Laurin. Nobody has a private CPP account, so the CPP would have to create a new system, replicating the setup in the retail investment industry, so it can administer money for private investors, he explains.
And financial institutions selling retirement savings products would push back, which is another reason why the idea won’t become a reality, says Greg Hurst, a pension consultant with Greg Hurst & Associates Ltd. “There’s a huge cost to entry in competing with the financial services industry in an area where they already dominate,” he says, calling the proposal “more electioneering than anything else.”
Even if the proposal comes to pass, it won’t displace contributions to mandatory defined benefit and capital accumulation plans, because these contributions are built into employees’ paycheques and employers typically match them, says Hurst.
With voluntary pension plans — especially those without an employer match — some displacement might happen, but it’s difficult to predict the impact in the absence of key details, he adds.
However, Moist doubts employees would take advantage of a voluntary CPP. “We’ve tried voluntary systems for 60 years. The unused contributions space Canadians have for RRSPs is in the hundreds of billions of dollars.”
Or, Hurst speculates, some firms may close their plans and encourage employees to use the CPP. Many companies — particularly small ones — feel they can’t afford to offer pension schemes, he says, adding that voluntary CPP expansion may lower investment fees industry-wide.
Public consultations on the idea are open until Sept. 10, 2015. For now, however, many remain unconvinced about the proposal’s value. “They’re not introducing this because they think it’s practical,” explains Moist.
“They’re in trouble on retirement security because they haven’t done anything, and they want to appear to be doing something.”
Yaldaz Sadakova is associate editor of Benefits Canada.
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