Rhys Kesselman is Canada Research Chair in Public Finance with the School of Public Policy, Simon Fraser University. His research has assessed proposals for Canada Pension Plan expansion.
Good politics all too often trump good policies. That truism will be put to the test with the Conservative government's reversal of its stand on the Canada Pension Plan.
After years of opposing provincial attempts to expand CPP retirement benefits for all Canadians, the feds have suddenly announced they would support a "voluntary" version. Is this simply an electoral gambit to counter the Liberal and NDP positions supporting comprehensive – or as the Conservatives would have it, "mandatory" – CPP expansion? What are the substantive policy merits and shortcomings of the voluntary and mandatory approaches?
The proposal to allow voluntary CPP contributions is remarkably devoid of details. The only clear features are that each individual could choose how much to put in beyond the required CPP contributions, and that companies would not have to add anything beyond the current 50-50 employer-worker split of the mandatory premiums.
The one indisputable advantage of the Conservative proposal relative to options for voluntary saving already available would be giving people access to the expert management of the CPP Investment Board. Over the past decade, the CPPIB has achieved annual returns of 6.2 per cent even after allowing for inflation.
However, the "voluntary" nature of the proposal has two crucial weaknesses relative to proposals for "mandatory" expansion of CPP. The policy problem is that too many middle-earning Canadians are not saving enough to maintain their living standards in retirement. They already have diverse voluntary means to save with favourable tax treatment: RRSPs, TFSAs and home equity. Adding yet another would not overcome this problem.
The other weakness of the proposal is that the associated benefits could not be guaranteed, or tied to the individual's earnings record, which characterize the current program. Rather, the retirement benefits would have to be like private savings – contingent on individual saving discipline and financial market vagaries.
As for the "mandatory" approach to CPP expansion – keeping the current structure of guaranteed benefits related to earnings but ramping up the contribution and benefit rates – one supposed negative arises. Individuals would not be able to decide how much extra to contribute. But addressing inadequate saving is precisely the purpose of the reform.
On the other hand, comprehensive CPP expansion would offer important positives. First, the reform could help to ensure adequate retirement income for middle-income Canadians, since the higher contributions would be required of all workers and self-employed persons. The enhanced benefits would be a wide-ranging solution for all Canadians, not the limited and patchwork results of voluntary CPP contributions.
Second, the CPP's "defined benefit" structure could be maintained for the augmented program. Defined benefits mean that individuals know how much additional income they will receive in retirement based on their lifetime earnings history. Their benefit rate will not be at the mercy of market ups or downs, at their retirement date, and their benefits can be indexed for inflation. Benefits can also be gender-neutral, unlike the biases typical in voluntary schemes.
Finance Minister Joe Oliver and his predecessor have repeatedly opposed comprehensive CPP expansion on the basis of what they call the "job-killing payroll taxes" needed to finance it. Yet they misconstrue CPP premiums as payroll taxes; unlike taxes that flow into general revenues, an individual's higher premium payments increase their future benefits. CPP premium rates were raised in the late 1990s with no hindrance to rapid employment growth.
So much for the substance of the competing policy proposals. What about their politics? According to a Nanos poll for The Globe and Mail, expansion of CPP benefits was the most popular of four policy initiatives posed – scoring 88 per cent support and more highly than reducing income taxes. (Expanding TFSA limits scored the lowest.) It seems unlikely that survey respondents were contemplating a voluntary variant of CPP.
Low-earning workers are covered adequately by other public pension programs, and wealthy individuals can manage for themselves. Thus, retirement income security is the ultimate "middle-class" policy issue – something that no political party can afford to ignore in a competitive electoral setting. As debate on exactly how to expand CPP unfolds over the campaign, we shall see whether winning politics can beget winning policies.