Ottawa's move last week to flatly reject a provincial pitch to expand the Canada Pension Plan is an unfortunate decision. The federal government is still choosing to back a far less effective retirement savings program.
Ontario and Prince Edward Island have proposed an expansion of the CPP to cover more income, up to a higher level (beyond the present $50,000 cutoff). That would improve future retirement outcomes for the current generation of middle-income earners, who are facing a drop in their standard of living once they retire. Instead, Ottawa remains wedded to the idea of a new, voluntary, private-sector savings program, which would give workers the option of setting aside money in individual savings plans – known as Pooled Registered Pension Plans – that would be offered by financial companies. A variant on the PRPP model has been approved by Quebec, and the program is favoured by other provinces, such as Alberta.
Canada's experience with RRSPs illustrates why another voluntary savings program is not as appealing an option as an expanded CPP. RRSPs have long provided a tax-effective way to save for retirement, yet three out of four eligible tax filers did not contribute one cent into their RRSPs in 2010. Canadians are already sitting on $633-billion of unused RRSP contribution room, and that figure keeps climbing.
The Ontario and PEI plan for a bigger CPP addresses the main defects of Canada's current retirement system. Because mandatory contributions come straight off paycheques, it ensures those who need the most help in saving will save. Because it is professionally managed at a lower cost than most mutual funds, it promises better returns than most average investors can achieve. And because it is an actual pension plan and not just a savings plan, it gives members a stable income in retirement that is not subject to the volatility of a personal portfolio.
The federal government has repeatedly said it is concerned that CPP expansion amounts to a new payroll tax that cannot be afforded at a time when the economy is still vulnerable. But PEI Finance Minister Wes Sheridan said last week that the Harper government could have at the very least countered with a more modest reform as a compromise. Ottawa's blanket rejection suggests that it never had any serious intention to back the idea.
For most middle-income earners, the current CPP pension in combination with the universal Old Age Security system cannot provide income in retirement at a level anywhere close to matching their preretirement earnings. The group most at risk is middle-income Canadians – the income level targeted by the CPP expansion plan. The federal government agrees that Canadians need to save more for retirement. The proposed PRPP program will not accomplish that goal, and will do it at a high cost to savers. CPP expansion can bolster retirement incomes universally, fairly and at a lower cost.
Ottawa needs to reconsider its position.