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Claude Lavoie was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023. He has represented Canada at OECD meetings and has received many honours, including the Queen’s Diamond Jubilee Medal.
Many people rage at (and envy) the “gold-plated” retirement plan for federal employees. Common complaints are that it’s unfair and overly generous in comparison with their own plans. But perhaps they should be asking why their plans are not as generous as the public sector’s.
It’s possible for all Canadians to have a secure, generous, indexed, defined-benefit pension like that of government employees. For that, we just need to expand the Canada Pension Plan. The CPP currently replaces 33 per cent of average lifetime income (up to a maximum), which is well below the estimated 60 per cent to 70 per cent necessary to maintain a similar standard of living in retirement. While some lower-income workers can reach this threshold through the accumulation of Old Age Security, Guaranteed Income Supplement and CPP benefits, the vast majority of workers must count on their ability and financial knowledge to invest adequately. About 75 per cent of private-sector workers do not have an employer-sponsored pension plan and, according to a study by Deloitte, about 55 per cent of near-retiree households are at risk of a significant drop in their standard of living.
Increasing the generosity of the CPP would ensure that every Canadian saves enough and receives a good pension at retirement. It would also bring a plethora of additional benefits to every worker, even those who have managed to save sufficiently.
Workers bear all the financial risks of their retirement funds, except for the few (mainly civil servants) with a defined-benefit pension plan. This includes the risk of outliving their retirement savings or seeing the value of their retirement funds drop abruptly because of market corrections. An expansion of the CPP would transfer these risks from individual workers to the government, which is much better placed to manage them, as it can pool risks across all Canadian workers and across generations of workers.
An expansion of the CPP would shelter retirement savings from high management fees associated with many private retirement savings vehicles. The CPP is also fully portable, making it easier to change jobs. And a higher amount of assets in the hands of the CPP Investment Board (CPPIB) could allow more investment in the Canadian economy.
There are obviously some costs – some perceived and some real – associated with expanding the CPP.
Increasing the generosity of the CPP would require higher contributions from employees and employers so the system remains fully funded. Employers not currently contributing enough to their employees’ pensions will argue that these higher contributions will kill jobs. However, the recent CPP expansion shows that these fears are overblown. Employer contributions have increased 20 per cent since 2019, yet employment has performed very well during that time if you discount the pandemic. Note that CPP premiums were also hiked 70 per cent between 1997 and 2003, yet the employment rate rose strongly. The economic impact is small because employer contributions are a small part of the overall compensation to employees and increases in contributions are gradually offset through market forces by other elements of the compensation package, including wages. And workers seem to be okay with this: Almost 70 per cent of respondents to a recent survey said they would take a better pension over higher wages.
It’s true that workers will have less disposable income during their working years so they can enjoy a better standard of living in retirement. This could be problematic for some lower-income households but could be addressed through complementary measures such as increases in the Canada Worker Benefit, for example.
Expanding the CPP would also expose a greater proportion of Canadian retirement savings to the risk of poor investment decisions by the CPPIB. We saw this with the Caisse de dépôt et placement du Québec and its handling of Quebec Pension Plans funds in the early 2000s. However, this could be easily managed with strong governance standards and the potential creation of a few different investment entities, each responsible for a share of CPP assets and each separated by information walls. At the same time, the CPPIB has a solid track record, delivering an average return of almost 10 per cent over the past decade, and its sound governance and performance have been internationally recognized.
A secure, generous, fully indexed, defined-benefit pension for all Canadians is not a pipe dream. It’s a highly feasible possibility. Could we shift the discussion from Alberta’s (pretty bad) idea to leave the CPP to a more serious discussion about expanding the system? Since we need most of the provinces on board and a few decades for everybody to reap the full benefits, we should start this discussion now.