The Canada Pension Plan is one of the country’s great public policy successes. It’s national: If you change provinces, it moves with you. Same story if you change jobs. You’re covered even if you’re self-employed. It’s cheap compared with private savings options. It’s flexible: you can retire early or late, and how much you get out, come retirement, is determined by how much you put in while working.
It’s basically a retirement insurance program: Risk is shared across millions of contributors, income is certain, and there’s no chance of outliving your savings. If policy-makers starting from scratch in 2013 wanted to design a best-in-class, national pension plan, they’d end up building the Canada Pension Plan.
It has just one defect: it’s not ambitious enough. It’s just too small. It’s like the world’s finest twin-sized duvet, trying to cover a king-sized bed.
Two provinces have recently put forward plans to grow the safety net to fit the times. Prince Edward Island’s Finance Minister, Wes Sheridan, is calling for an expanded CPP: Take what works and make it bigger. The Liberal provincial government of Ontario, which has been demanding an expanded CPP, is now – in frustration – working on plans for its own Ontario Pension Plan.
Economist and former Finance Department official Don Drummond describes this as a “definitely in the second best world,” and he’s right. The only reason to talk about building a hodgepodge of new and costly provincial pension plans from scratch is if the improvement of the existing, national pension plan is impossible. Most of the provinces want the first-best option. The roadblock is federal Finance Minister Jim Flaherty.
The provinces and the feds at least agree on this much: Canadians aren’t saving enough for retirement. A large number of Canadians – particularly middle-income earners in the work force today – are at risk of seeing their living standards fall in the golden years.
The reason we aren’t saving enough has to do with the changing architecture of the Canadian retirement income system. Solid when it went up two generations ago, it can no longer pass a building inspection. It needs a renovation, before people start falling through the cracks.
The retirement income system is built on three pillars. One pillar is taxpayer-supported programs such as Old Age Security and the Guaranteed Income Supplement, which keep the lowest-income retirees out of poverty. The second pillar is CPP (and in Quebec, the parallel Quebec Pension Plan). The final pillar is private savings, made up of company pension plans and individual savings through RRSPs, TFSAs and so on.
If you work in government, your employer pension plan is solid. If you’re in the private sector, it’s a very different story. Defined-benefit pension plans, which guarantee a level of income in retirement based on years of service and income, and are what most people think of when they hear the term “pension,” are increasingly being wound down. In their place are more uncertain defined-contribution plans, which are basically just savings plans. They shift retirement risks from companies back to individuals.
Millions of other Canadians have no company savings plan at all. And a growing number of Canadians have careers marked by self-employment, entrepreneurship or frequent job changes, a pattern that doesn’t fit with the old company pension plan model.
Simply exhorting people to save more for retirement doesn’t work. Ask any behaviourial economist: planning for a distant, uncertain future is hard. Only 24 per cent of eligible Canadians contributed to an RRSP in 2011, the most recent year for which Statistics Canada has data. That year, the mountain of unused RRSP contribution room had ballooned to more than $683-billion. It’s an amount that has been growing, not shrinking.
The federal government’s preferred response to this, unveiled earlier this decade, is the Pooled Registered Pension Plan. The name is misleading: It isn’t a pension plan. It’s just another voluntary savings vehicle. Companies can choose to offer them – or not. If they are ever offered, employees can choose to invest – or not.
The better approach is the one championed by PEI’s Mr. Sheridan. Expand the CPP. Focus that expansion on middle-income Canadians. Bump up contribution rates, and increase the amount of income insured by the plan. The more we put, the more we will eventually get out.
Right now, CPP only covers earnings below roughly $50,000, and it aims to replace only about 25 per cent of that income in retirement. That’s not enough for middle-income Canadians. The PEI plan would bump up coverage to incomes up to roughly $100,000, and would aim for 40-per-cent income replacement. It could be accomplished by raising CPP contribution rates from 9.9 per cent (split between employees and employers) to around 13 per cent.
It should be done, and it should be done soon. Conservatives of the large and small-c variety have long been uncomfortable with a bigger national pension plan. It sounds like a tax increase. It’s not. It’s a savings plan. And it’s the best one we’ve got.