By Todd Humber
Everyone agrees Canadians need to save more for retirement. But that’s where the consensus ends when it comes to exactly how to boost the incomes of retirees.
Defined benefit (DB) pension plans are slowly going the way of the dodo. Defined contribution (DC) plans are a much more popular option for employers, and understandably so. It gives predictable, fixed costs and there’s no unfunded liability on the books.
But many DC plans are falling short, meaning workers are having to work longer and contribute more in an effort to attain a comfortable standard of living in their golden years. That has ramifications for the next generation of workers, who are clearly struggling to get a career foothold.
So if DB plans are disappearing, and DC plans aren’t cutting it, how can we ensure Canadians have enough income in retirement?
Some provinces, including Ontario and Prince Edward Island, along with labour groups have been pushing Ottawa to expand the Canada Pension Plan (CPP).
And that makes a lot of sense. The CPP is well run, well funded and it’s pretty much as easy as flipping a switch to increase contributions from employers and employees in order to provide richer benefits for retirees.
But the CPP is also a “payroll tax” — which is a four-letter word to Conservatives.
And employers aren’t exactly lining up to pay more taxes, nor are employees pining to have a bit more chipped off their paycheques.
And yet 32 per cent of 200 employers surveyed by Morneau Shepell said the best way to improve retirement income is to actually expand the CPP. One-third is hardly a majority, but — surprisingly — that was the number one answer from employers. In second place (25 per cent) was simply telling Canadians to save more money (which we know won’t work), followed by mandatory employer and employee contributions of two per cent to a supplementary plan (23 per cent) and auto enrolling everyone in a pooled registered pension plan (PRPP).
If the CPP were expanded, 11 per cent of employers would wind down their plans, the survey found, while 29 per cent would reduce benefits dollar for dollar and 26 per cent would reduce plans by a smaller amount. One-third (34 per cent) said they would make no changes to their pension plans if the CPP expands.
This week, Ottawa basically put its foot down and said a firm “no” to the idea of expanding the CPP. The ruling Conservatives said asking people to pay more when the world economy is fragile makes no sense, according to Reuters.
"Now is the time for fiscal discipline... now is not a time for CPP payroll tax increases," Junior Finance Minister Kevin Sorenson told reporters after what he called a very frank discussion. "There was no consensus today on expanding CPP. We will continue to look at the economy and discuss this again in the future."
Ontario responded by saying it plans to move ahead with its own provincial plan — let’s call it the Ontario Pension Plan (OPP) for sake of ease, while trying not to confuse it with the province’s police force.
An OPP, frankly, sounds terrifying.
Setting up and running a massive pension plan from scratch will be no inexpensive endeavour. There will be far less bang for the buck than merely flipping the switch and upping contribution levels on the CPP.
We can debate the merits of raising CPP premiums in a tough economy, but for a province swimming in red ink with an embattled economy — it’s a non-starter. I don’t want to get too political, but the Ontario government doesn’t have a strong track record in recent years of getting large products done on time and on budget (see eHealth).
Plus, there is already talk in Canada’s largest province of a vast array of new taxes, including road tolls and a 10 cent per litre gas tax to pay for expanded transit. Plus hydro bills in the province are going nowhere but up — there’s a $1 billion bill for a couple of cancelled gas-powering generating stations still to pay.
The idea that, at this time, Ontario would launch its own pension plan is terrifying for the economy.
Ottawa has done a lot in recent years to encourage more saving, including tax free savings accounts (TFSAs) and introducing PRPPs. But the uptake hasn’t been high enough, and Canadians aren’t saving enough for retirement.
Expanding the CPP, somehow, still seems like the best solution on the table — especially when the talk turns to individual provinces launching their own plans.
Todd Humber is the managing editor of Canadian HR Reporter, the national journal of human resource management. He can be reached at email@example.com