Kevin Milligan is a professor at the University of British Columbia's Vancouver School of Economics.
The Ontario government sketched in some more detail on the coming Ontario Retirement Pension Plan this week.
The new ORPP supplements the existing Canada Pension Plan with extended coverage for those who don't already have a comparable workplace pension. The ORPP provides a benefit of 15 per cent of earnings at a cost of payroll contributions of 1.9 per cent each for employees and employers on earnings of up to $90,000 a year. This week's announcement generated a new round of complaints about the ORPP, but it's important not to let problems with the ORPP undermine the strong general case for public pension expansion.
There is a pension problem in Canada. Research from a variety of sources reveals that middle earners without workplace pension coverage run a strong risk of arriving in retirement without enough income to sustain their lifestyle. This undersaving arises for a variety of economic and psychological reasons, but the impact is felt by us all.
Undersavers draw more heavily on the means-tested parts of our system, which increases the tax burden on everyone else. Because the source of the problem is a failure of some people to save even with all the tax-preferred savings options currently available, adding still more voluntary savings options is unlikely to solve the problem. It's like pushing on a string.
A fairer and focused solution is to ensure everyone saves at least enough for a basic retirement lifestyle out of his or her own earnings. An earnings-based public pension plan is a proven, efficient and effective vehicle to tuck away the savings needed for a secure retirement.
A targeted expansion of earnings-related public pensions will very likely improve the well being of many seniors. But, as we move from the general case to the specifics of Ontario's ORPP, the situation changes in two important ways.
First, an Ontario-only plan faces a number of challenges because only one province is acting on its own. Setting up a new administration for collecting payroll contributions and paying benefits is costly and inefficient. Figuring out a way to handle the mobility of workers and retirees in and out of Ontario also creates problems.
Worse still, the lack of co-operation between the federal and Ontario governments means that vital tax changes to accommodate the ORPP aren't being made. This denies Ontario residents fair tax treatment of their pension contributions. Some of these problems can be solved with better co-operation, and "muddle through" solutions can be found for others. But, taken together, these challenges make the ORPP much harder to set up.
The second problem with the ORPP is a mismatch with the pension problems we actually face. The ORPP doesn't focus just on middle earners, but also covers low earners. Our current retirement system pays Old Age Security and the income-tested Guaranteed Income Supplement to those who had low earnings during their work lives. The combined pension income for these low-earning Canadians is often more than they were making when working.
An expanded ORPP effectively transfers money away from these low earners when they are struggling in their working years to a time in retirement when they are already doing a bit better. Moreover, these low earners will pay full ORPP premiums on their earnings, but lose up to half the value of their ORPP benefits because of income testing of their other benefits. Expanded earnings-related pension coverage for low earners is a very bad deal under our current system.
Given these shortcomings, the case for the ORPP is mixed. Fortunately, a federal initiative to expand the Canada Pension Plan and displace the ORPP before it launches in 2017 is still possible.
An expanded CPP solves the first set of Ontario-only problems by enabling collective action across provinces. In addition, a new round of CPP negotiations gives us another shot at designing an appropriate expansion targeted at middle earners where it is needed, instead of roping in low earners to a pension expansion that hurts them.
With the current federal campaign, we have a unique opportunity to ensure our retirement system is focused on meeting the needs of Canadians. When federal candidates knock on your door in the next few weeks, we should all try raising the topic of public pensions to see what commitments they will make.