Will it be 2010 again or even a reprise of 1979 for federal and provincial finance ministers now holding their annual meeting? On those earlier occasions the ministers seriously considered expansion of Canada Pension Plan retirement benefits but passed over the proposal based on a variety of objections.
However, the tide has been turning on this issue with support from the provinces growing steadily. In 1979 the proposed expansion of CPP benefits — endorsed strongly by a federal interdepartmental task force after intensive study — was blocked by Ontario. This time around, Ontario is the cheerleader for expanding CPP, even holding hostage proceeding with the federal-promoted Pooled Registered Pension Plans (PRPPs).
In 2010 the proposal to expand CPP initially had federal government support and appeared likely to proceed, but before the ministers met the feds withdrew their support. They were apparently deterred by Alberta’s active opposition to the reform and Quebec’s reluctance to proceed in view of that province’s own public pension problems.
This time around, both Alberta and Quebec appear more receptive to expanding CPP, making support potentially unanimous among the provinces. But this time it is the federal government raising objections, with Finance Minister Jim Flaherty sounding alarms about the economic impact of raising CPP premium rates to finance enlarged benefits.
Yet the expressed concern over impacts of increasing premium rates — like many objections to CPP expansion raised over the years — lacks empirical foundation. Between 1997 and 2003 CPP premium rates were increased by nearly 70 per cent (without any associated benefit hikes), while the national employment rate rose steadily and strongly with only a small slip in recessionary 2001.
A further hike in CPP premium rates would similarly be spread over six or more years, and the first small instalment would undoubtedly be delayed at least until 2014 due to the requisite legislative and regulatory changes. The total rate hike would be smaller than in the earlier episode, and the linkage of increased premiums to increased benefits this time would blunt any adverse economic incentives.
Increasing CPP retirement benefits is supported by a multitude of public policy considerations, and studies suggest that it would be superior to the institution of PRPPs. Those plans, endorsed at the 2010 finance ministers’ meeting in preference to CPP expansion, offer few advantages beyond existing RRSPs and defined-contribution pension plans. They are also inferior to the Canada Pension Plan in their voluntary nature, retirement date risk, lesser pooling of various risks, and lack of indexation.
Instituting PRPPs with voluntary participation by both employers and employees is unlikely to redress much of the problems faced by the 60 per cent of Canadians who do not currently have access to a workplace pension plan. While initially supportive of the PRPP concept, the provinces have been slow to adopt enabling legislation.
Enlargement of CPP benefits has emerged as the best pension reform option in many independent expert analyses. Notable supporters of CPP expansion include former Bank of Canada and Canada Finance luminary David Dodge, former CPP chief actuary Bernard Dussault, former CPP Investment Board chief executive David Denison, and former Statistics Canada chief assistant statistician Michael Wolfson.
The format and scale of CPP benefit expansion advocated in the studies vary, but most would go well beyond the mooted “three 10 plan” now being considered by the Finance Ministers. Rather than hiking benefits from the current 25 per cent of insured earnings by 10 percentage points, an increase to the 40 to 50 per cent range is commonly endorsed. And rather than raising the insured earning maximum from the current $50,000 by a suggested $10,000, a hike on the order of 50 per cent is widely recommended.
Without changes of these magnitudes, the retirement prospects for middle-earning Canadian workers will continue to be at risk. A study by Mr. Wolfson projects that, without CPP expansion, about half of those now earning $35,000 to $80,000 annually can expect a substantial drop in their living standards after age 65.
The temptation for cautious policy makers — and politicians — is to dawdle in choosing options that carry near-term uncertainties but substantial albeit more-distant gains. CPP enlargement will take some 40 years to mature fully, as the reform raises benefits to individuals only in proportion to their higher contributions.
This long gestation period is all the more reason for the Finance Ministers to proceed quickly and boldly with plans to increase CPP retirement benefits. While the provinces have steadily shifted to support CPP expansion, the financial industry has been constant in its opposition ever since 1979. That remaining obstruction and economic misconceptions can hardly justify any failure to act effectively on the income security of future retirees.
Jonathan Rhys Kesselman is a professor at the School of Public Policy, Simon Fraser University, Vancouver, and holds the Canada Research Chair in Public Finance. His analysis on policy proposals can be seen here; an earlier commentary on CPP expansion is also available.