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The evidence is clear: if middle income Canadians want to have adequate incomes in retirement, they have to force themselves to save. The most efficient way to do this, by far, is to work together – to legislate individual contributions to a broadly-based program that pays retirement benefits when we get old; in short, the CPP. (Catherine Yeulet/Getty Images/iStockphoto)
The evidence is clear: if middle income Canadians want to have adequate incomes in retirement, they have to force themselves to save. The most efficient way to do this, by far, is to work together – to legislate individual contributions to a broadly-based program that pays retirement benefits when we get old; in short, the CPP. (Catherine Yeulet/Getty Images/iStockphoto)

Why we need a better Canada Pension Plan Add to ...

Canada’s finance ministers have just concluded another meeting postponing – yet again – improvements to the Canada (and Quebec) Pension Plan.

The same tired conflicts are still at work: the business community is opposed to higher payroll taxes, or to the enlargement of the public sector for any reason; while progressive voices, as well as those simply examining the available evidence, are rightly concerned that Canadians are not saving enough for retirement.

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Even Finance Minister Jim Flaherty, for a time two years ago, agreed that a “modest expansion of the CPP” was good policy.

But the Harper government decided instead to introduce voluntary Pooled Registered Pension Plans, even though decades of experience with enlarged RRSP contribution room still shows most middle income Canadians choose not, or find themselves unable, to save as much as these generous tax incentives already allow.

The evidence is clear: if middle income Canadians want to have adequate incomes in retirement, they have to force themselves to save. The most efficient way to do this, by far, is to work together – to legislate individual contributions to a broadly-based program that pays retirement benefits when we get old; in short, the CPP.

Mr. Flaherty, in objecting to enlarging the CPP, is worried that expanding CPP benefits payable sometime in the future, accompanied by an increase in contributions today, would be risky for the overall economy.

But how much tax increase are we talking about?

The Canadian Labour Congress proposal is to double CPP benefits as a fraction of pre-retirement earnings, from 25 per cent to 50 per cent. Payroll taxes would then have to increase by about 5 percentage points (combined employee and employer contributions, covering only current service costs, and CPP benefits payable only after age 65).

Interestingly, when the CPP contribution rate was increased by an even larger amount in the 1990s to make the plan fiscally sustainable – from 3.6 per cent to 9.9 per cent, an increase of 6.3 percentage points – there were no loud objections from the business community or fiscal conservatives.

Other proposals involve increasing the maximum earnings eligible for CPP benefits, and on which contributions are payable, beyond the current $50,000. Some combination of increasing the benefit rate above 25 per cent, and increasing covered earnings beyond $50,000, is essential for the CPP to provide more adequate retirement income.

Still, this debate about CPP expansion is too limited. Are there no more creative options?

Consider three other major factors: First, life expectancy has been increasing by about two years every decade since at least the 1950s. This means that by the time any expansion of the CPP is fully phased in, life expectancy could be as much as 10 years higher than it is today.

Second, the detailed simulation analysis I did last year for the Institute for Research on Public Policy (IRPP) showed that a doubling of the CPP would have only modest benefits even for those at the young end of the baby boom (those in their mid-40s today). The simple reason is that they will be reaching age 65 within 20 years, when the benefit increases would be less than halfway phased in. And third, high-income individuals live and collect CPP pensions longer than those with middle and lower incomes.

These factors in turn suggest essential policy responses, none of which has yet been addressed by Canada’s finance ministers, at least in public.

An expansion of the benefit levels of the CPP should be phased in more rapidly, say over 20 to 25 years rather than the 47 years implicit in all the current discussions. In parallel, the age at which full benefits from the CPP would start should rise gradually from 65 to 70. More rapid phase in of benefits, of course, means payroll taxes would have to rise. But a delay in the age when benefits become fully payable would reduce the need for tax increases.

Finally, the long run structure of the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) portions of Canada’s public pension system should be coordinated with any changes to CPP to assure it is fair to those with lower incomes – a point clearly lost on the Harper government with their most recent cuts to OAS and GIS.

These options open the possibility of a more creative and better pension bargain – more adequate pensions that are also fiscally sustainable. Are Canada’s finance ministers ready to think outside the box?

Michael Wolfson is an adviser with EvidenceNetwork.ca, and Canada Research Chair in population health modeling/populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada, and has a PhD in economics from Cambridge.

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