The best route to pension reform in Canada is to expand the Canada Pension Plan rather than adopt a proposal to create a new voluntary savings plan, according to a retired federal government economist.
Keith Horner, who spent a lengthy career working on tax and pension policy at the Department of Finance, argues in a new report that a modest expansion of the CPP would provide higher benefits to Canadians for every dollar contributed, compared with other proposals being studied by finance ministers to bolster retirement incomes.
Mr. Horner said increasing a mandatory defined-benefit (DB) pension plan such as the CPP and Quebec Pension Plan – which provides a guaranteed or "defined" level of income in retirement – would work best if there is still room for people to save on their own to boost their retirement incomes.
"It appears that the greatest benefits to participants and to the economy would come from the introduction of a national DB plan, such as enrichment of the CPP/QPP, provided that the scale of the new plan leaves most participants with room for individual choice in the level and timing of their savings," he wrote in the report.
Federal and provincial leaders have been debating options to reform the pension system because of rising concerns that middle-income earners are not saving enough to retire comfortably, and are increasingly losing access to workplace pension plans.
In December, finance ministers endorsed a proposal to create a so-called pooled registered pension plan (PRPP), which would provide a voluntary pension savings plan for the self-employed and those who do not have a workplace plan.
The PRPP or similar proposals "would be considerably less effective than the other options in generating new net savings or reducing the savings gap" for retirees, Mr. Horner argues in a report published Tuesday by the independent Institute for Research on Public Policy.
The PRPP proposal "should be seen only as complementary" to other pension reforms, he said, and it may not have sufficient size or low enough administration costs "to offer a real improvement over current savings options."
However, the analysis also shows a PRPP program would be far more effective if employers were required to offer it to employees than if it were voluntary for employers.
Mr. Horner proposes increasing the CPP benefit enough that it would provide income in retirement – when combined with the core old-age security program – equal to about 52 per cent of pre-retirement earnings for an average worker making $45,000 a year. That's an increase from 38 per cent replacement of pre-retirement earnings currently.
He said that means there would still be room for supplementary savings through RRSPs or other programs.
Janet McFarland