Robert L. Brown is an expert adviser with EvidenceNetwork.ca, a retired professor of actuarial science at the University of Waterloo and immediate past president of the International Actuarial Association.
A new report came out last week that reiterates what we've heard from other sources a few times now: that Canadians aren't saving nearly enough for retirement. Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal warns in it that without urgent pension reform, today's younger workers will see a steep decline in living standards as they retire.
The Conservative federal government has recently announced it would like to have a dialogue with Canadians about a potential voluntary expansion of the Canada Pension Plan. While this, in itself, is a purely political action – it commits the government to nothing – it's worth looking at what the possible outcomes might be.
We know that 76 per cent of workers in the private sector have no pension plan at all. They are left totally to their own initiative to save for retirement. They are not trained in this "retirement-income security" science. They can get retirement savings products but have to pay extremely high fees (known as the management expense ratio or MER) for this expert management – 250 to 300 basis points, or a full 2.5 to 3 per cent of their cash flow. And sometimes, their agent doesn't even work on their behalf, but rather acts to maximize his or her own income.
With this in mind, perhaps it would be wise to finally consider an expansion of the CPP at a time when it and its investment arm, the Canada Pension Plan Investment Board, are riding high.
But the right decision is not obvious – far from it.
Amendments made to the CPP in 1996 state that any new benefits must be fully funded. That means you only get back what you have paid for in full. Under current rules, it takes 39 years at a minimum to earn a full benefit. So if you make a contribution today, in 2015, you would have earned just 1/39th of a full benefit. Full benefits would not be available until 2054.
So if we think we have a problem in terms of people who plan to retire in 2054 not saving enough today, then we must amend the CPP now.
The CPP is currently organized and administered like a defined-benefit plan, where plan members know how much they are going to get every month. Moving to voluntary contributions, as the Conservatives wish, would force it to be administered much more like a defined-contribution plan, where payouts are tied to actual investment returns.
Why does this matter?
If workers can move their money in and out of the CPP fund freely, this will create the potential for anti-selection on the part of the participants – they will move in when the times are good and out when they're bad. This will result in the need for the CPPIB to move toward much more liquid shorter-term assets with lower rates of return. It would also mean much higher administrative costs for the CPP (especially the investment arm, as it would have to track the cash flows of individual accounts).
This would be on top of the relatively high management-expense ratio for the CPPIB – estimated in the range of 90 to 100 basis points (0.9 to 1 per cent), which is multiples of what other very large plans cost (Ontario's Healthcare of Ontario Pension Plan , the B.C. Public Service Pension Plan and even some private-sector plans, such as Bombardier), which are run with expense ratios closer to 25 basis points.
It would also make all Canadian workers much more dependent on the investment capabilities of the CPPIB and the decisions made there, versus the myriad of private managers now being used. So the word "voluntary" cannot be taken lightly.
Further, the CPPIB is having problems keeping all of its $265-billion invested in safe but high-yield investments. What will it do with another tier of contributions?
Finally, one can certainly expect vehement push-back from the private sector that caters to retirement savers at a nice profit margin.
So what if the extra contributions are mandatory? That will result in serious problems for very poor workers.
Imagine that these workers, and their employers, were forced to contribute to a new tier of the CPP. Not only would they not receive full benefits for another 39 years, but when they did get their extra CPP benefits, they would lose the impact of these extra payments as they saw their Old Age Security and Guaranteed Income Supplement benefits clawed back.
Since GIS payments are often matched by provincial schemes (such as GAINS in Ontario), many poor workers will lose $1 of OAS/GIS and provincial supplements for every new dollar of CPP benefits. So they and their employers will be contributing from money they need now for higher-order needs (such as food and rent), but will receive no new net benefits down the road. That is regressive. And we know that employers, such as those represented by the Canadian Federation of Independent Business, will aggressively oppose any such mandatory imposition.
In summary, we are faced with a myriad of questions, and not only do we not have any good answers, we have no answers at all. It's time our governments started paying some serious attention to the complexity of this issue.