Updated: Feb 23
Higher CPP appeals to most people but who would pay for it? .
Many argue that the Canadian Pension Plan (CPP) benefit to be enhanced by increasing the monthly benefit payment. Some argue that government paid retirement incomes should be sufficient to replace Canadians’ accustomed pre-retirement living standards. Others feel it should simply be more inclusive since many people don’t quality for CPP. Is expanding CPP the best approach or are there other more effective ways to achieve the objective of enhancing pension programs?
CPP - accumualting assets at Canadian's expense
CPP holds $234 billion in assets and has been effective in managing both investments and costs.One of the reasons for the CPPIB's 'success' is that amount they pay out in CPP benefits annually is significantly less than what is addedt annually in contribtions and earnings. I other words, CPP is accumulating assets and on the backs of the average Canadian.
Objectives of improving government pension programs
A critical first step is to clarify whether the objective of expanding government pension programs: is it to simply increase the number of people that qualify i.e. receive retirement income or, to improve CPP benefits for Canadians who would already qualify now or in the future? The objectives are not clear.
Paul Owens, Deputy Superintendent of Pensions, Albert came to the conclusion that CPP, OAS and GIS are not sufficient to retire comfortably. This is not surprizing given that the average CPP payout is about $550 per month. CPP benefits are already adjusted every January based on increases in the cost of living as measured by the Consumer Price Index (CPI) but CPP does not reflect the actual cost of living. The issue is that the current CPP benefits are too low and need to be increased. Perhaps the issue is that the government should be be forthright and state that middle class working Canadians now and retiring in the future will not be have adequate goverment retiement incomes.
The advocates for CPP expansion propose that benefit improvements be self-funded; paid for by gradually increasing CPP premiums. This represents a tax increase for the those working, which adds to the disposable income problems already experienced by many Canadians. The uncomfortable reality is that someone has to pay for the benefit increases regardless of the delivery vehicle.
What appears to be missing in the CPP expansion debate is a clear indication of what the annual cash cost will be for employees and employers. Higher CPP premiums will adversely affect business cash flow and competitiveness. For employees the reduction in disposable income may result in lower contributions to DC plans, DPSPs, PRPPs, RRSPs or TFSAs and RESPs. There are many unknown or unintended consequence of expandingCPP.
More unanswered questions
What amount of additional CPP benefits will contributors actually receive? Do those paying higher CPP premiums know what they will get? The retirement date for CPP (and OAS) is being pushed out to age 67 so benefits are already delayed. Increased CPP benefits would also reduce GIS and OAS payments for some lower income people: their overal net benefit from a CPP increase may be insignificant. In any cases however, the government would benefit from higher CPP benefits because recipients would pay pay more tax in the future.
The current CPP inflation adjustment process one of the underlying problems. How will the federal and provincial governments recoup the tax revenue lost from higher deductible CPP premiums.
New York’s major Bloomberg said it best “In God we trust. Everyone else, bring data”.
OAS - An alternative approach
Depending on the objectives, an alternative to CPP expansion might be to expand the OAS system. OAS is available (with minor exceptions) to all Canadians, it’s fairly straight forward and the claw back feature allows recipient-income targeting. OAS is paid out of general revenues and is a major annual federal government expense.
Why not a straight forward transparent OAS approach? Determine and publicize the annual cost of increased pension benefits, use OAS as the vehicle, and pay for them on an annual cash basis by dedicating a specific percent increase in GST to paying for OAS. This has several advantages: benefits could be targeted and limited, costs would be transparent and Canadians would know what the additional GST additional GST was for. An expanded OAS approach could effectively become a 'quaranteed income' approach which could eliminate or replace all or paret of welfare progarms.
The CLC want CPP benefits to be significantly higher and made expansion an election issue. According to the CLC a worker earning $47,200 per year can double future lifetime CPP benefits by paying an additional CPP premium of $3.57 per week ($186 per year) for seven years. This would be wonderful, but it almost seems too good to be true. There does appear to be a consensus and pressure on the federal government to improve CPP. Ontario and Manitoba are proceeding with their own mandatory provincial pension plan to complement CPP. Perhaps a simpler approach would be for CPP to also oversee a Pooled Registered Pension Plan (PRPP) open to all Canadians.
Since working Canadians will pay for any benefit increases, they should have a clear understanding of the objectives and assumptions, and more information on the costs and benefits.
Again, before focusing on which vehicle is best suited to delivering pension enhancements Canadians need more information and hear informed honest debate on the issues otherwise they arew simply being asked to buy into “a pig in poke”.
Gerry Wahl, Managing Director, THE PensionAdvisor