Former Bank of Canada governor David Dodge has called for an expansion to the Canada Pension Plan to boost retirement savings, but says many Canadians also need access to new voluntary savings options like the proposed Pooled Registered Pension Plan program.
In a report prepared for the Ontario Finance Ministry, Mr. Dodge and co-author Richard Dion, who is a senior business adviser at law firm Bennett Jones LLP, conclude Canadians are not saving enough for retirement, which is going to put an enormous burden on governments who will have to provide income support to more seniors in an aging population.
“An increase in future CPP pensions financed by an increase in actuarially appropriate CPP premiums starting in the near future would be an efficient measure to increase household saving and to provide for higher retirement incomes,” their report concludes.
For many middle- and upper-income Canadians, a CPP expansion is a “superior” way to save for retirement even to most corporate pension plans, which are not typically indexed to inflation, and to individual savings vehicles, which do not provide guaranteed income in retirement, the report says. CPP provides a maximum annual income of $12,500 to retirees.
However, Mr. Dodge and Mr. Dion also say expanded CPP contributions can only go so far to boost retirement incomes, and will only partly meet the need to increase savings for many people. The report says governments should also allow Pooled Registered Pension Plans (PRPPs) and should change the rules to make company pension plans more sustainable by allowing them to share funding risks with plan members.
PRPPs have been touted by the federal government as a new vehicle for people who do not have workplace pension plans. They would allow employees to voluntarily contribute to a pooled savings plan through paycheque deductions, and would earn returns based on the performance of the plan, similar to personal RRSP programs.
So far, Quebec is the only province that has passed legislation to set up a PRPP program effective July 1, 2014, but at least three other provinces have signalled they intend to proceed.
Ontario, however, has said it favours an expansion to the CPP, but has not won support from the federal government or some other provinces to amend the national program. As a result, Premier Kathleen Wynne has pledged to introduce a made-in-Ontario solution to build a supplement to CPP in the province.
Mr. Dodge and Mr. Dion do not offer any comment on how an Ontario supplemental plan should be designed.
The report says expanding CPP would have an economic impact because people would have to pay higher premiums, which would cause a reduction in disposable incomes, but it says the impact would be minimal to the economy and would be offset by making retirees more wealthy.
“These costs would be small relative to the longer-run benefits of more adequate retirement income income and higher potential output and consumption,” it says.