Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.
Geordan Omand of the Canadian Press reports, Revamp of Canada Pension Plan centre stage at finance ministers’ meeting:
The federal finance minister says revamping the Canada Pension Plan is critical to ensuring that future generations of Canadians can retire in dignity, no matter the state of their finances.
Bill Morneau joined his provincial and territorial counterparts in Vancouver on Monday to discuss reforming the national pension program over concerns that some Canadians will struggle financially come retirement.
“We’ve heard from Canadians (about) the importance of retirement security,” Morneau said before the meeting.
“I’m looking forward to working together with my colleagues across the country to improve the long-term future for Canadians.”
The pressure is on to reach a deal as Ontario’s plans to develop its own pension program are well on their way, though the province’s finance minister said his preference would be for a national strategy.
“We want consensus. We want everybody to participate. We want everybody involved,” said Charles Sousa, adding that he wants to reach a deal in Vancouver.
Quebec Finance Minister Carlos Leitao was not as optimistic about coming to an agreement on Monday, saying that any change would have to be targeted, modest and gradual to earn his province’s support. So far Ottawa’s plan is only two thirds of the way there, he said.
Leitao put forward a proposal during the meeting that more selectively targets those Canadians who are the least likely to save in order to avoid putting an additional financial burden on low-income earners.
Under the Quebec plan, increased pension premiums would only kick in for those who make more than about $27,000 per year, which is about half the yearly maximum pensionable earnings for 2017.
The proposal argues that supplementing the income of Canada’s lowest earners is better achieved through other government policies, such as old age security and the guaranteed income supplement.
Reforming the pension system needs the support of at least seven provinces representing two thirds of the country’s population, which gives Ontario an unofficial veto over any decision.
The legislation, as currently written, also states that any reforms can only be implemented three years after a federal-provincial agreement is reached.
Coming into the meeting, Saskatchewan and B.C. have suggested economic conditions aren’t right for a change that’s likely to lead to an increase in the premiums that come off workers’ paycheques.
That premium hike is why some critics of the expansion call it a payroll tax, a common refrain from the Opposition Conservatives who oppose an across-the-board expansion of the program.
Federal research has suggested that workers who are the least likely to save for retirement tend to be under the age of 30, earn between $55,000 and $75,000 (although some estimates are higher), and either don’t save enough or lack access to a workplace pension plan.
The federal and provincial governments are looking at a possible increase in the $55,000 cap on annual maximum pensionable earnings, which would result in both higher premiums and increased pension benefits.
Of course, critics abound. Kelly McParland of the National Post reports, Can Bill Morneau save Canada’s pension plan from Ontario?:
Canada’s finance ministers will meet in Vancouver today for a new round of talks on pensions, resolute in their determination to solve a crisis that doesn’t exist.
Federal Finance Minister Bill Morneau has pledged to seek agreement on “enhancing” the Canada Pension Plan by the end of the year. An initial meeting with provincial counterparts in December was considered a success in so far as no one stomped out of the room in outrage. But no actual money was on the table at the time; the ministers merely agreed to “enter into discussions to review next steps,” and to meet again. The Vancouver meeting may mark the beginning of the hard part.
The task is complicated by several uncomfortable realities. One is that there is no crisis. According to any number of reports by respected institutions, both in Canada and abroad, Canadian seniors are doing quite well. Four out of five have the income they need in retirement. The poverty rate among seniors has plummeted over the past four decades: although advocacy groups pick and choose the figures they use to best bolster their argument, even the starkest numbers suggest seven out of eight seniors are above the line. Compared to other developed countries, Canada ranks near the very top; Statistics Canada figures show the share of seniors living in low-income families fell from 29 per cent in 1976 to 5.2 per cent in 2011, four points lower than the overall population.
Despite the lack of a sweeping need, Morneau and Ontario Premier Kathleen Wynne have nonetheless signalled their intention to save the day. They fear the country’s aging population will mean an increased number of elderly who find themselves outliving their means. Indeed, after years of decline, poverty figures have been creeping higher, especially among older, widowed women. “Progressives” argue that Canadians aren’t saving enough, and thus need government action to protect them from the consequences.
Ontario wants Morneau to “fix” the CPP by increasing contributions. Former finance minister Jim Flaherty resisted similar pressure because it would mean higher premiums, and smaller paycheques, for working Canadians who can ill-afford it. That argument makes little headway in Ontario, where Wynne’s government is determined to press ahead with an Ontario-only scheme that will start siphoning money from contributors on Jan. 1, 2018. Only a broader reform of the CPP will stop the province from barreling ahead with its ill-conceived plan.
Ontario’s resolve is wrong-headed on several fronts. It will represent an additional cost of doing business in a province that has seen its manufacturing base erode and its finances sink deeper into debt. It will put a strain on those at lower income levels who can’t afford the additional deductions, and who are already adequately covered by the package of benefits that include the CPP, the Old Age Security pension and the Guaranteed Income Supplement. While a second government pension might benefit some middle-class Canadians, it would reduce the income available during their working years for raising families and paying mortgages, as well as for personal investments. Advocates of pension reform seem oblivious to the fact that, thanks to health improvements, many older Canadians prefer to continue working beyond the traditional retirement age of 65. Canadian seniors are not the doddering grandmas and grampas of the government’s imagination, but a vibrant and energetic cohort of people who aren’t prepared to be put out to pasture.
The situation represents a problem for Morneau. To halt Ontario’s plunge into ORPP he needs agreement on a federal enhancement to CPP that won’t do more harm than good. To significantly change CPP he also needs agreement from seven of 10 provinces representing two-thirds of the population. But Quebec is reluctant — “I don’t think there’s any sort of crisis in our public pension system,” says Finance Minister Carlos Leitao — Saskatchewan is opposed and British Columbia has doubts. Manitoba’s new Conservative government may also by more prone to small, targeted improvements over a sweeping revamp.
Ontario’s ORPP would threaten the balkanization of a system intended to apply equally to all Canadians. It is in Canada’s interest to avoid this. Morneau must find a way to prevent Ontario from undermining the system as a whole while averting reforms that would be just as damaging. It’s a daunting task, demanded by an unnecessary crusade.
Every time provincial finance ministers get together to discuss enhancing the CPP, Canadians are bombarded by flimsy articles claiming “everything is fine, we don’t need to enhance the Canada Pension Plan.”
True, there is no imminent crisis and Canadian seniors are doing quite well on a relative basis but this is an extremely naive and shortsighted argument against not enhancing the CPP. It’s like knowing the tsunami is coming but we should all just relax instead of preparing for it (click on image):
The premise behind enhancing the CPP is to offer Canadians who are not saving enough for retirement a pension that ensures they can retire in dignity and security in an era that will be marked by ultra low rates and returns.
I know, some experts claim there is no savings problem in Canada, but other experts disagree and think that far too many Canadians are ill-prepared for retirement. Others claim that the majority of Canadians are saving, just not wisely (although the advice they offer is equally terrible).
The truth is a lot of Canadians aren’t saving enough in large part owing to the ongoing housing bubble in this country that keeps inflating residential real estate prices to epic levels. Many people are barely making their mortgage payments, leaving very little or no money to save for retirement.
But even those that do manage to save a lot of their discretionary income are better off with an enhanced CPP. Why? Because regardless of their family income and amount of savings, nothing beats a defined-benefit plan which offers predetermined benefits indexed to inflation that are not subject to the vagaries of public markets. Also, they can’t outlive their pension contributions to the CPP whereas most Canadians with no workplace pension will outlive their savings soon after they retire.
What else? Despite the critics, Canadians are getting a great bang for their CPP buck. The folks over at CPPIB are pension experts who know what they’re doing. They have the resources to pool investments, lower costs and invest directly in public and private markets across the world, leveraging off their scale, internal expertise and long investment horizon which allows them to capitalize on short-term market dislocations that can hurt or wipe out individual savers.
What about all those critics who claim that enhancing the CPP is a “tax” which will hurt the economy? They are completely and utterly clueless. Those CPP contributions will help fund the future retirement of millions of Canadians. And as the population ages, people with a fixed and secure income are in a better position to spend, allowing the federal and provincial governments to collect tax revenue in the form of sales taxes (conversely, the less money they have, they less they spend, the less sales taxes governments collect). Also, more people retiring in dignity and security means less money has to be spent on social welfare programs, reducing the overall debt.
In fact, the direct and indirect benefits of defined-benefit plans are grossly under-appreciated. It’s simply mind-boggling that anyone claiming to be a policy expert fails to see them. I don’t care about their political affiliation, good pension policy is good economic policy for the long-run. Period.
I mention this because one of my close friends is a die hard Conservative who totally agrees with me on enhancing the CPP. He too doesn’t understand the case against enhancing the CPP (many Conservatives are way off on this issue letting politics cloud their judgment).
As far as Ontario, the ORPP isn’t an impediment to an enhanced CPP and Premier Kathleen Wynne is signalling she’s willing to abandon her proposal to create a provincial pension plan if Monday’s meeting leads to a deal on improvements to the Canada Pension Plan.
Please keep all this in mind as the finance ministers debate yet again whether or not to enhance the CPP. I hope they get this right and finally introduce much needed change to bolster Canada’s retirement system.