Double the Canada Pension Plan Benefit
Konrad Yakabuski wrote a good final piece on Saturday to cap the interesting and informative Globe series on the pensions crisis. In it he touches on several possible policy solutions, including a universal pension plan.
Unfortunately, he does not cite the Canadian Labour Congress proposal to double the CPP as part of a three pronged effort to fix pensions, including an increase to the Guaranteed Income Supplement to deal with poverty in old age, and pension insurance to backstop employer pensions which fall short.
As Yakabuski notes,Â individual saving for retirement through RRSPs is needed to supplement inadequate public pensions for the many workers (75% of the private sector workforce) who do not belong to an employer sponsored pension plan. Public pensions – the OAS/GIS and the CPP/QPP – have done a good job ofÂ providing a half decent basic retirement income to Canadians but, in combination, they replace only some 40% of earnings for an average worker, and less for those who earn more than the average.Â Employer pension plans have serious financing problems of their own, and are going to cover fewer and fewer workers as time goes by. Very few new defined benefit plans are being set up.
RRSPs are a poor solution to eroding employer plans on several grounds.Â People do not save nearly enough at an age when it counts.Â Individuals on their own cannot pool longevity risk and should save as if they are going to live into extreme old age, even though the great majority will not.Â Administrative and investment fees charged to RRSP returns are in the range of 2-3%, vastly higher than in larger pension pools yet alone the CPP,Â and enough to cut actual rates of return to a fraction of those in bigger plans. And, RRSPs (as well as defined contribution pensions) do not provide a guaranteed or inflation-linked final benefit, leaving retirees annuitizing their lifetime savings at the mercy of fickle markets. (The price of a lifetime annuity will vary greatly with the level of interest rates, while asset prices, especially equities, are hugely variable.)
The CLC proposal is to double the CPP benefit from 25% to 50% of average earnings by phasing in a fully-funded add on benefit. Prefunding through the gradual accumulation of an additional investment fund means that the required premium increase would be much less thanÂ the current employer/employee combined premium of 9.9%. The plan and premium increase would be phased in over several years, and the full increase in the benefit would go only to those now entering the workforce and future workers. Current workers would, however, gradually build up a better CPP benefit.
The great virtue of using the CPP vehicle is that it provides a fully inflation indexed, fully portable, defined pension benefit at extremely low cost.Â Other plans like the ABC (Alberta BC) proposal for provincial defined contribution plans and the similar national proposal put forward by Keith Ambactscheer do create larger pools than individual savings, but fall well short of the CPP.Â At the same time,Â a doubled CPP would still leave room for employer based plans intended to provide better benefits, notably earlier retirement, than the CPP. Gradually doubling the CPP would take some of the burden off existing employer plans, since the great majority are integrated with CPP (ie the defined benefit provided by the employer plan is usually net of whatever benefit the CPP provides.) That means that the premiums required to fund employer plans would go down as CPP premiums went up.
The financial industry are the big promoters of “fend for yourself ” RRSPs which kick out lucrative returns, to them, but that should not stand in our way.Â Our current problems are the result of a compromise with the financial industry in the mid 1960s which left Canadians with a very modest public pension plan compared to most other countries.
The other objection one hears is that lower income workers would be forced to save more for little or no greater return, since the OAS/GIS already delivers a basic benefit. True to a point, but we can raise pensionable earnings and/or increase CPP contribution tax credits so that those with well below average incomes are exempted from higher premiums.
Employers, it is said, will object to paying more. But many employers, including small businesses, are prepared to contribute to an effective pensions vehicle, and current sponsors of pension plans and savings would pay no more than at present.
Doubling the CPP is a more practical proposal than a wholesale swallowing up of current pension plans in one universal pension, and is under active consideration by several provinces. It is an idea whose time has come.