According to the Melbourne-Mercer Global Pension Index, Canada has the sixth-best pension system in the world. We get good marks for providing low-income workers with high earnings replacement in retirement, and for the quality of our pension institutions. We score less well in providing middle-income private-sector workers with supplementary pension plans that will permit them to reliably maintain their post-work standard of living in the decades ahead.
Canada’s finance ministers have been aware of this problem for years, and two options to address it have emerged:
1. Enhancing the CPP/QPP, and
2. Creating simple, low-cost Pooled Registered Pension Plan (PRPP) options that would be provided by Canada’s financial services industry.
Unfortunately, previous finance ministers’ meetings failed to produce a consensus on how to proceed, with some provinces favouring Option 1, and other provinces and the current federal government favouring Option 2.
Monday’s gathering in Meech Lake offers the finance ministers a golden opportunity to break the CPP/QPP versus PRPP deadlock.
The “Three 10s” proposal for enhancing CPP/QPP reported in The Globe and Mail this past Friday seems to fit the “modest enhancement” descriptor needed for consensus. This proposal envisions increasing the CPP/QPP pension from 25 per cent to 35 per cent earnings replacement, on earnings up to $60,000/year rather than $50,000/year, phased in over a 10-year period. At the same time, ministers could also decide to proceed with a co-ordinated launch of an equally modest PRPP initiative that would be carefully integrated with the CPP/QPP enhancement initiative.
Reaching a decision on Monday to proceed with an integrated “1+2” pension reform strategy would (at last!) mark the end of the beginning of pension reform in Canada. It would also mark the beginning of the next phase: designing an effective “1+2” implementation package. Tough questions that would have to be answered in an understandable manner include:
• There is consensus among Canadians that any CPP/QPP enhancements would have to be properly costed and pre-funded. What assumptions would be used to do the costing? What specific pre-funding approach should be adopted? How will unintended and unfair wealth transfers between older, younger and future generations of workers be avoided?
• Would a PRPP initiative that does not require employers without pension plans to enrol their workers in a qualifying PRPP have any value? What should the PRPP default contribution rates for employers and employees be? Should both have “opt-out” options to not make contributions? What kind of supervision is required to ensure that PRPPs offer “value for money?” (e.g., simple and low-cost).
• How will the “1+2” pension reform package deal with the ability of low-income workers to access the income-tested Guaranteed Income Supplement (GIS)? For example, if the pension reform package reduces the current income of low-income workers by forcing them to save more for retirement, only to lose access to GIS later on, is that an intended consequence of the reform package? Would that be fair?
The point of these questions is to say that even if the ministers were in principle to decide to proceed with a “1+2” pension reform strategy on Monday along the lines set out here, much work remains to be done before it can be implemented in practice.
However, it is equally true that without such a decision now, Canada will continue to linger behind the world’s Top 5 countries in pension provision (Denmark, Netherlands, Australia, Sweden and Switzerland). More importantly, middle-income private sector Canadian workers will continue to be exposed to the risk of materially lower post-work living standards in the decades ahead.
Keith Ambachtsheer is director of the Rotman International Centre for Pension Management at the Rotman School of Management, University of Toronto.