By now, Ottawa and the provinces were supposed to have been deciding how – not whether – to expand the Canada Pension Plan. When federal Finance Minister Jim Flaherty and his provincial counterparts met six months ago, they promised to gather again in June to nail down the elements of a “modest” CPP overhaul that would address Canada’s pension gap.
Since then, CPP reform seems to have fallen off the radar. There was no mention of it in the federal budget. Mr. Flaherty’s first priority appears to be scaling back public-sector retirement benefits, not boosting the CPP for Canadians without workplace pensions. The budget’s talk of “low-cost pension options” was code for private-sector solutions to the savings gap that threatens the retirements of millions of Canadians.
With economic growth hovering around 1.5 per cent this year, meaningful CPP reform could slide further down the agenda. Mr. Flaherty and Alberta Finance Minister Doug Horner have previously cited a fragile economy as an excuse to punt on pension reform – as if short-term economic weakness absolved them of the responsibility for making long-term policy.
Procrastination won’t make the problem go away. Or will it? A new paper by the chief actuary at pension consultants Morneau Shepell argues that Canada isn’t facing a retirement crisis after all. According to Fred Vettese, Canadians are richer than they think. And since they’ll be working deep into their 60s anyway – due to the looming labour shortage, not lack of retirement savings – any move to increase CPP contributions would be counterproductive.
“The bigger problem,” Mr. Vettese writes in the Rotman International Journal of Pension Management, “may very well be one of over-saving … This would seem like a virtue at best, and innocuous at worst, but if a significant proportion of the population is already over-saving, then increasing the level of forced savings would simply exacerbate the problem and lead to a lower standard of living before retirement for many Canadians.”
Mr. Vettese’s analysis runs contrary to the consensus view among experts, however. CPP benefits currently top out at about $12,000 a year. As a result, a February CIBC report projected that 5.8 million Canadians face a decline in living standards of more than 20 per cent when they retire. Those born in the 1980s can expect a drop of 30 per cent.
It’s not hard to see why. Household debt is at a record level in Canada. Not only are many Canadians not saving enough, they’ve been borrowing beyond their means in order to buy real estate. Housing has traditionally been a dependable nest egg, but that requires equity, something today’s condo buyers, with their meagre down payments, build little of.
The CIBC report served as the basis for CEO Gerry McCaughey’s call for the creation of a “supplementary CPP” that would provide a “predictable income stream” at retirement. Mr. McCaughey’s scheme would be voluntary, however, and employers would not have to match employee contributions.
For those reasons, it’s an insufficient solution. A voluntary plan would benefit only those who are already likely to be savers. But if there is a looming retirement crisis in Canada, it is among those who don’t save enough. They, and their employers, may need to be forced into contributing to a beefed-up CPP.
Those, however, are considered fighting words by small business. The Canadian Federation of Independent Business last month fired a warning shot at the finance ministers with a report predicting that an increase in joint employer-employee CPP premiums to 12.1 per cent from 9.9 per cent – the amount needed to fund a “modest” enhancement in benefits – would cost the economy 700,000 person years of employment over 20 years and bid down wages by 1.5 per cent.
In a recent op-ed, CFIB head Dan Kelly struck out at public-sector unions, which have been among the loudest advocates of an enhanced CPP. “Keeping CPP expansion in the news,” he wrote, “helps government unions divert attention from their gold-plated plans.”
The savings gap is still on the agenda of the Ontario government. Finance Minister Charles Sousa vowed, in his May budget, to pursue a “modest, fully-funded enhancement” to the CPP. And the Quebec government, which administers the CPP-aligned Quebec Pension Plan, has expressed a new openness to reform and is considering the creation of a “longevity pension” for those over 75.
But if Mr. Flaherty and his provincial counterparts do meet this month, what are the chances they will punt again on pension reform?