Ontario released some long-awaited details about its impending provincial pension plan last month, as the implementation timeline creeps closer.
The Ontario Retirement Pension Plan (ORPP) is scheduled to be implemented Jan. 1, 2017, but many employers have been anxious to have for more information about the plan’s new requirements.
The ORPP will be indexed to inflation and should eventually cover more than three million people who do not already have a workplace plan, said Ontario Premier Kathleen Wynne at a Toronto news conference.
“I won’t be premier when the young people who work here today retire so it would’ve been easy to kick this decision down the road,” said Wynne. “But that would be irresponsible.”
Ontario finance minister Charles Sousa said the benefit and focus of the ORPP is long-term, both for individuals and the economy.
“After a lifetime of contributing to the economy, every Ontarian deserves a secure retirement,” he said. “In the long-term, the economy will also benefit from the increase of investments and savings. Ontarians deserve a secure retirement and a strong economy, and the ORPP will help us achieve that goal.”
Under the plan, workers and employers will contribute an equal amount capped at 1.9 per cent each — or 3.8 per cent total — of the employee’s annual salary. The plan is designed to give members a 15 per cent income replacement rate after they contribute to the plan over 40 years.
An individual’s pension benefit will be calculated using his average earnings over the years he contributed to the plan. The plan is projected to begin paying benefits in 2022.
There will also be a survivor benefit paid to a plan member’s spouse, even if the member passes away before retirement. This is a measure not currently included in the Canada Pension Plan (CPP).
The first employers to contribute to the plan will do so beginning Jan. 1, 2017. The government’s goal is to have every employee in the province enrolled in either the ORPP or a comparable workplace plan by 2020.
However, the 2017 implementation timeline is an ambitious one, said Karl Baldauf, vice-president of policy and government relations at the Ontario Chamber of Commerce in Toronto.
“When you take into consideration a limited amount of direct communication from the government to employers in relation to their obligations under the ORPP, when you take into account changes that are going to be made to payroll in advance of implementation starting, we believe the timeline is very ambitious,” he said.
“That lack of communications is leading to the ORPP quickly becoming a source of confusion for many employers... they’re unable to determine whether or not they will have to participate in the ORPP, which implementation wave would apply to them, whether they will have to update their current compensation and retirement savings plans and, beyond all of that, there’s no indication from the government when employers will receive this information.”
The ORPP has been an ongoing challenge and concern for many chamber members, he said.
“We’re going to continue to recommend the government modify the implementation timeline. But regardless, as a chamber, we’re going to continue to work with the government to ensure that if this is their desired plan, as much as possible, we’ll make sure it can be implemented with limited impact.”
The new plan has also been a major concern for small and medium-sized businesses in the province, said Plamen Petkov, vice-president for Ontario at the Canadian Federation of Independent Business (CFIB) in Toronto.
“The ORPP has been our members’ top concern since it was first announced in 2014... The vast majority of them will be impacted by the ORPP because, currently, they can’t afford to offer a workplace pension plan.”
There’s nothing wrong with the objective — everyone wants to have a more comfortable retirement, said Petkov.
“But the ORPP comes with a very high cost and, unfortunately, it will be mostly small and medium-sized business owners who will have to bear that cost,” he said.
“Really, what our members are mostly concerned about is when you operate a small business, you have a small budget. And when new business costs or payroll costs such as this are being introduced, you have to find the money from somewhere.”
Generally, employers have two options: Increase prices or find the money from payroll — which means reducing hours, reducing positions, freezing salaries or not giving wage increases, said Petkov.
“(In) the latest survey that we have done on this, about 70 per cent of our members indicated that they will have no choice but to freeze or cut salaries to be able to cope with the additional costs,” he said. “The people who the ORPP is meant to help are going to be the first ones that are going to experience the short-term impact of this by either getting their hours reduced, getting their positions reduced or even losing their job because the employer is not able to cope with the financial impact.”
A cost-benefit analysis of the plan that came out in December predicted a negative effect on the economy over the first 20 years of its lifespan, said Baldauf.
“While in the long-term this cost-benefit analysis suggests that the ORPP would have positive impacts on consumer spending and the GDP, there is a period over the immediate future where the plan would be taking money without any payout, and so that will have a negative impact,” he said.
“We want government to recognize that there’s an obligation for them to help mitigate the negative consequences by introducing measures that would offset the incoming costs of the new pension plan, offset that decline in consumer spending, offset the loss in GDP through target tax relief.”
The best solution?
And though the ball is already rolling, some are still questioning whether the plan is the best option to address retirement savings gaps in the province.
Universal expansion is far from the ideal move, according to Ian Lee, assistant professor at the Sprott School of Business at Carleton University in Ottawa.
“There is no justification for a universal CPP reform, nor is there any justification for ORPP,” he said. “We do not have a ‘pension crisis,’ we do not have a ‘savings crisis’ — there is a small minority of Canadians that do have a problem. It is not a universal problem requiring a universal solution whereby we reform the entire CPP system.”
Almost 10 per cent (7.2 per cent) of retirees are below the poverty line, which represents one of the lowest percentages among Organisation for Economic Co-operation and Development (OECD) countries, he said.
“Then, when you look at the people who have not yet retired, there is agreement amongst the researchers that somewhere between 15 and 20 per cent of Canadians who have not yet retired are not pension-ready. In other words, over 80 per cent of Canadians are pension-ready. So the idea that there’s large numbers of Canadians who face an imminent collapse into poverty is simply an urban legend,” said Lee.
And the widely held idea that the bottom quintile or the bottom 20 per cent of income earners will be in trouble when it’s time to retire is largely untrue, he said.
“Their income goes up on average by over 20 per cent when they retire. That may sound astounding but the logic is very clear. People in the bottom quintile tend to be minimum wage (earners) when they are working,” said Lee.
“When they retire, they get old age pension which is non-contributory — they qualify because they’re below the low-income cutoff (which is the poverty line). They get GIS, which is the guaranteed income supplement, and they get CPP. The three together bring them up on average in retirement by plus 20 per cent.
“The problem, contra Premier Wynne, is not in the bottom quintile.”
The problem is overwhelmingly people in the middle- and upper-middle class, said Lee.
“And when they drill down to say, ‘Who are these people in the middle and the upper-middle?’ they have a profile — they have characteristics. Number one, they don’t have their own employer pension, which in that sense I do agree with Premier Wynne to a degree… but it goes beyond that because there are many others who don’t have an employer pension who are pension-ready.”
They also have other characteristics that co-relate, said Lee. They typically have no savings, they do not contribute to retirements savings plans and they don’t have any savings outside of a pension plan. They’re not self-saving and they tend not to own real estate. So what happens to them when they retire?
“They’ll drop from $100,000, $125,000 a year, they’ll drop down to around $40,000. Now that’s a precipitous decline, let’s be clear — but that is not poverty. The poverty line in Canada is $22,700,” said Lee.
All this seems to suggest a broad-based solution such as the ORPP may not in fact be the best solution at all, he said.
Some advocates are still calling for a different solution, said Petkov.
“Ideally, what our members want is that the government halts implementation or at least delays implementation. Ninety per cent of our members are opposed to it and this is a very, very strong opposition... especially given that 98 per cent of all businesses in Ontario are small or medium-sized,” he said.
“There is still time for the government to put the brakes on this.”
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