The NDP has promised to “gradually double the Canada and Quebec Pension Plans, making it possible for Canadians to top up their public pension with personal savings.”
But how can CPP/QPP be made bigger?
There is one option that would be both worthwhile and politically viable: a group RRSP or a group TFSA, backed by the Canada and Quebec Pension Plans. It’s extremely difficult for small investors to find safe investments that offer low fees and a reasonable rate of return. Governments could help Canadians by providing such a savings vehicle – the mutual fund equivalent of Canada Savings Bonds.
The financial services industry is likely to be less than thrilled by the introduction of attractive government-sponsored investment options -- one person’s costs are another person’s benefits -- but then again, the financial services industry is probably not a core NDP constituency.
When it comes down to it, there are only two ways to gradually double a person’s Canada and Quebec Pension Plan benefits.
The first is to gradually increase that person’s Canada and Quebec Pension Plan contributions.
The second is to make someone else pay for those increased benefits -- someone, somewhere, sometime will have to either make higher contributions, or receive less in benefits.
That’s the question for the NDP: who pays, how and when?
Canadians are often reminded that the Canada Pension Plan is well-funded and financially secure.
We receive less-frequent reminders of the reason why the CPP is in such good financial shape: contributions are high relative to the amount paid out in benefits.
Contributions total 9.9 per cent of earnings between $3,500 and $48,300 (in 2011). Of that amount, 4.95 per cent comes from the employee, 4.95 per cent from the employer.
Benefits are about 25 per cent of pre-retirement earnings, up to a maximum of $960 per month.
Superficially, CPP does not look like a very good investment -- contributions of almost 10 per cent over a working life of 25, 30 or 40 years, benefits of 25 per cent over a retirement of 10, 15, 20 years.
CPP contribution rates are what they are for two reasons. First, today’s contributions are paying for both today’s benefits and tomorrow’s benefits. Most of today’s retirees did not contribute enough when they were working to pay for the cost of the benefits that they are currently receiving. That deficit is being made up for by greater contributions from younger workers.
Second, CPP is a disability insurance plan as well as a retirement plan. Private disability insurance coverage comparable to that offered by CPP would be very costly. (A third factor to remember is that CPP also offers survivor and death benefits).
It all makes sense from a policy point of view.
But I think it creates a sense of dissatisfaction with the CPP, a sense that “I’m not getting enough benefits.” It’s that dissatisfaction which I believe has motivated the NDP to promise a gradual doubling of the Canada and Quebec Pension Plans.
Frances Woolley is a professor of economics at Carleton University
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