Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
Don Pittis of CBC News reports, Now that Bill Morneau conquered the CPP it’s time to move on to a harder pension problem:
Who would ever have guessed that hammering out a Canada Pension Plan solution would have been so easy?
With such widespread support for Finance Minister Bill Morneau’s latest pension reforms, perhaps the government will finally have the confidence and wisdom to solve the other giant pension problem: the case of the missing money.
Only a year ago, calls for CPP reform seemed to be falling on deaf ears. Opponents labelled contributions to our own retirement a “payroll tax” and talked about the danger of big government.
Small business hollered that their share of the contribution would slash profits and lead to job losses, something the government denies. Some of those objections have not gone away.
“Finance ministers are putting … jobs in jeopardy and willfully moving to make an already shaky economy even worse,” said Canadian Federation of Independent Business president Dan Kelly in a scathing release just after the federal-provincial accord.
According to the CFIB, the only good thing about the reform was that it superseded the Ontario government’s pension plan, which Kelly called “the CPP’s far uglier cousin.”
The surprise was not the CFIB’s intransigence. Unexpected was the amount of support from some business owners and from commentators often considered right-of-centre and pro-business, despite the fact that some details have yet to be worked out.
As the C.D. Howe pension panel adviser Tammy Schirle commented in the Report on Business, among many advantages of the plan, when employers and employees contribute to the CPP they effectively save the future taxpayer the cost of paying the way of people who failed to save.
That sounds like an argument I made in 2013 that at the time was a voice in the wilderness in the face of a tidal wave of opposition to CPP reform.
Politics have changed with the arrival of the Liberal government. But maybe the public mood has changed, too. If so, it is time for the government to solve the other great problem of Canada’s pension system.
Several flaws with objections
There are several flaws with business objections to contributing to CPP. One is the idea that the true cost of contributing to the retirement costs of low wage and temporary employees should not come out of profits, but instead be borne by future taxpayers.
And this is exactly the next problem that Morneau, with his sophisticated understanding of the pension system from his career in that business, must now address.
There is no question that it is good to solve the problem of wage earners who fail to contribute enough to their own retirement, as the CPP reform goes part way to doing.
Far more unjust is the problem of people who dutifully contribute to a pension throughout their lives and don’t see the benefit, once again leaving taxpayers on the hook. It is the problem of ghost pensions, and it is something that in the wake of the CPP success, should not be impossible for Morneau to address.
Fantasy fiction statements
The essential problem is that while employees watch their pension payments come off their periodic cheque and while benefit statements show their pension amounts growing toward a comfortable retirement, that money being set aside is imaginary.
Government employees are not exempt from the travesty, as we saw in the Quebec municipal pension cuts and the collapse of Detroit. In both cases, governments claimed to be tucking away the pension funds but suddenly employees discovered those pension statements were fantasy fiction.
In some ways, I suppose, when governments default on their responsibility, taxpayers are on the hook in any event, but the case of private companies that default on pensions is more egregious.
When companies go broke, money owed to pensioners is classified as part of the company’s assets, so in the case of a large contribution shortfall, pensioners who gave up years of wages to cover their pensions, only get a fraction of the money they are owed. Secured creditors, those who lent money against a specific asset, get paid first, and theoretically are able to take all the money before pensioners get a dime.
Whether for public or private pensions, the solutions are surprisingly simple.
One easy fix is to make it a law that money set aside as indicated in pension statements is actually set aside. Instead of being kept in imaginary accounts, the funds are managed by bonded professionals whose only responsibility is to current and future pensioners.
Phased in changes
In that way, employers who strike a bargain with their workers immediately see how much it is costing them instead of running up deficits in their pension accounts that only get more and more impossible to repay when the employer gets into financial trouble.
In the case of companies that feel they cannot make a profit without the capital owed to pension funds, the simple solution would be to make it a law that any borrowing is treated as a secured creditor of the highest order.
Studies in the past have indicated that such rules, put in place when a company is healthy, are no impediment to companies raising money from other sources. Lenders do not expect healthy companies to fail or they would not lend them money in any case.
As with the CPP changes, there will be objections from business, but everyone else knows it should be done. The difficulty is making an abrupt change.
That is the brilliance of the CPP plan that Morneau could repeat here. By phasing the changes in over a number of years, employers would be able to adjust to the new reality, but future pensioners — and taxpayers — would be saved from unexpected losses.
I appreciate what Don Pittis is writing about in this article but I have an even better idea: get companies out of running pensions altogether.
I wrote about this in my comment on real change to Canada’s retirement system when the Liberals swept into power:
In my ideal world, we wouldn’t have company pension plans. That’s right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large “CPPIBs”. We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.
Companies should focus on their core business, not pensions. I know, there are some excellent company defined-benefit plans but they’re the few. The majority are struggling in a low rate, low return world.
Now that we got an agreement to expanding the CPP, maybe we can talk seriously about how best to deal with company DB and DC pensions. In my opinion, we can and should seriously think about having an entity like CPPIB manage all these pensions. If not CPPIB, then another public pension fund which specializes in managing pensions and is backed by the full faith and credit of the federal government.
Companies will sign on because they’re already looking to cut their pension costs. Why do I like the idea of CPPIB or several “CPPIBs” managing all pensions? Because it makes sense and it will be in the best interests of all stakeholders: companies, governments, and most importantly, beneficiaries.
Again, imagine a world where all pensions are managed by the Canada Pension Plan. Workers in the private and public sector have automatic pension portability and those in the private sector can rest assured that no matter what happens to their company, their pensions won’t be slashed and they can still retire in dignity knowing their pensions are safe and secure.
By the way, this is the future of pension policy. We’re not going to have company pensions or even municipal pensions. We are going to have one big entity called CPPIB or several “CPPIBs” managing the pension contributions of all Canadians.
No more Ontario Teachers, HOOPP, OMERS, Caisse, bcIMC or even PSPIB. They will still be around but they’re going to be covering the pensions of a lot more people.
You might think I’m dreaming but this is where we are heading or at least where we should be heading.
In related news, Andy Blatchford of the Canadian Press reports, CPP boost to cost feds $250M per year to offset fresh burden on low-wage earners:
The federal government estimates it will cost taxpayers $250 million per year to offset the additional financial burden that expansion of the Canada Pension Plan will eventually place on low-income earners.
Ottawa and the provinces reached an agreement-in-principle this week to gradually increase CPP premiums as a way to boost the program’s benefits for future generations of retirees.
The announcement also included a federal commitment to enhance its refundable “Working Income Tax Benefit” to help compensate eligible low-wage earners for the higher CPP contributions.
The Finance Department projects that change will cost about $250 million annually once the CPP premium increase has been fully phased in.
The federal government also says it will allow the provinces to make specific changes to the tax benefit so it’s more harmonized with their own programs.
Due to this, Ottawa says it will continue working with the provinces and territories before implementing the adjustments to the tax benefit.
The Canada Revenue Agency describes the tax benefit as a refundable tax credit that provides relief for low-income individuals and families who are already in the workforce. The agency also says the benefit encourages others to enter the workforce.
Earlier this week, every provinces except Quebec and Manitoba agreed to the deal to expand the CPP.
The agreement states that CPP premium increases on workers and employees will be phased in over seven years, starting on Jan. 1, 2019.
Under the deal, the federal government also said it would provide a tax deduction — instead of a tax credit — on the increased CPP contributions by employees.
The CPP changes will increase the maximum amount of income subject to CPP by 14 per cent, to $82,700.
The full enhancement of the CPP benefits will be available after about 40 years of contributions, the government said.
The income replacement rate will rise to one-third from one-quarter, meaning the maximum CPP benefit will be about $17,478 instead of about $13,000.
Also, Molly Ward of BNA reports, Canada to Extend Pension Plan Tax to Higher Incomes, Increase Rate:
Canada is to implement a new, separate tier for the Canadian Pension Plan (CPP) that would increase the existing upper earnings limit to C$82,700 ($64,580) from C$54,900 ($42,870) by 2025, according to an agreement reached by Canada’s Ministers of Finance and published by the government June 20.
The current CPP contribution rate also is expected to increase by 1 percent for employers and employees to 5.95 percent from 4.95 percent over five years beginning Jan. 1, 2019, for those already in the existing annual pension earnings range, Canada’s Finance Department spokesperson David Barnabe told Bloomberg BNA June 21. Actuarial assessments are to be used to determine final tax increase amounts.
Beginning implementation in 2024, earnings greater than the existing annual pension earnings range will be subject to a new tax for both employers and employees that is expected to be 4 percent, Barnabe said.
Under the two tier system effective 2025, the rates and ranges would be:
- 5.95 percent for those at or less than the earnings cap (currently C$54,900 in 2016 but is to increase incrementally each year according to a legislated formula) and
- 4 percent for those with earnings greater than the earnings cap to C$82,700 range that previously did not have coverage.
- Earnings more than C$82,700 will not be subject to pension plan contributions.
“We believe this is a positive move by the federal government. The plan is to make incremental changes and we are very supportive,” said Steven Van Astine, Vice President of Education at the Canadian Payroll Association.
The agreement was signed by eight provinces. Quebec and Manitoba withheld their signatures.
The federal government has asked the provinces to finalize the agreement by July 15.
Impact on Ontario Pension Plan
Ontario Finance Minister Charles Sousa has told Canadian media that the proposed adjustments to the CPP would allow the province to not continue pursuing the implementation of its own provincial pension plan, which was scheduled to go into effect on certain companies beginning January 2018.
Indeed, the Toronto Star reports, Ontario halts pension work with CPP deal looming:
Staff at the soon-to-be-disbanded Ontario Retirement Pension Plan have hit the “pause” button on implementing the retirement scheme while critics fume they are “twiddling their thumbs” at taxpayers’ expense.
Finance Minister Charles Sousa said the halt comes as Ontario and most other provinces face a July 15 deadline to approve a provisional deal reached Monday to improve Canada Pension Plan payouts for retirees.
“We’re working now to put a pause on all activity,” Sousa told reporters Wednesday, noting the ORPP will not proceed with its most costly step — hiring a company to administer the plan.
Officials will be meeting “in short order” to decide how to close out the ORPP and staff will have to stay on to handle those duties, Sousa said.
“That’s what we’re working on,” he added, correcting earlier statements from his associate minister Indira Naidoo-Harris that implementation was proceeding in case the CPP deal falls through. Progressive Conservative MPP Julia Munro said a contingency plan should already be in place because the government had long hoped its Ontario pension plan push would prompt other provinces to back an enhanced CPP.
“Fifty employees, including (chief executive officer) Saad Rafi and his $525,000-a-year salary, will spend an undetermined amount of time twiddling their thumbs in their offices,” warned Munro (York-Simcoe).
“Ontario has already sunk at least $14 million into the ORPP. This does not include severance payments that may be awarded to employees.”
I didn’t even know they already hired a CEO and staff for the ORPP. What a total waste of money this is and I’m shocked that they didn’t wait to see how the CPP talks were going prior to making such commitments.
One final note, I’m having troubles with my Gmail account, so if you didn’t read my last comment on Brexit, you can do so by clicking here. By Friday morning, this will all be behind us.