Ottawa’s proposed new pension system is little more than the existing RRSP program with a new label, and could actually be a worse option for low-income earners, according to a new analysis by the C.D. Howe Institute.
A report released Thursday says the federal government’s Pooled Registered Pension Plan (PRPP) proposal, which is being touted as a way to provide pensions for self-employed people and others who do not have workplace plans, does not improve enough on the existing Registered Retirement Savings Plan (RRSP) system long in place in Canada.
“As currently proposed, PRPPs present only the appearance of reform because they are for the most part a re-release of an existing retirement savings vehicle – RRSPs – with a new coat of paint,” said James Pierlot, a pension specialist who co-authored the C.D. Howe study.
The federal government passed legislation in June to create PRPPs, but the program needs provincial buy-in to be introduced across the country. So far only Quebec has introduced matching legislation, while Ontario said earlier this year it has concerns about the program and believes a better option might be to expand existing Canada Pension Plan coverage. Other provinces have also yet to commit to the plan.
The C.D. Howe study said PRPPs are only a modest improvement over RRSPs because tax rules will prevent many workers from saving enough under the scheme to earn an adequate income in retirement. The new scheme won’t do enough to increase overall savings by Canadians, who already typically fail to maximize their RRSP contributions, the report said.
Even worse, the report argues PRPPs should be avoided by many lower- to mid-income earners because tax rules could see their other Old Age Security and Guaranteed Income Supplement benefits clawed back at higher rates than if the money were contributed elsewhere. Many of those people would be better off putting their money in new Tax Free Savings Accounts (TFSAs), the report suggests, where they will lose less income over the long term.
The report was criticized Thursday by Ted Menzies, Minister of State for Finance, who has taken the lead in championing the federal government’s PRPP proposal. Speaking to the Economic Club of Canada in Toronto, Mr. Menzies said PRPPs would be managed with far lower administration costs than most RRSP savings vehicles can offer, which leads to higher proceeds on the investments.
Responding to questions after he remarks, he also said finance ministers from all provinces met in December, 2010, and at the time there was no consensus to support expanding the CPP, but broad consensus to go ahead with the PRPP process. He acknowledged many provinces have changed finance ministers since 2010, however, and said views may have shifted on PRPPs and CPP expansion since.
“If they think there’s merit to enhancing the Canada Pension Plan, we’re certainly willing to look at that,” he said.
He added the government has had calls from business groups and self-employed people to go ahead with the PRPP plan as a more affordable option for them than CPP expansion.
“This [PRPP plan] isn’t meant to solve everyone’s savings needs, but it provides another option,” he said.