A savings safety net

Doubling Canada Pension Plan benefits would provide all Canadians with a safe retirement, but it’s a risky plan that is set to spark a major political battle

by Peter Shawn Taylor, Jullia Belluz

A savings safety net

Hernandez has put 15 years' worth of savings into his new Toronto restaurant. Most people aim for a retirement income of 60 per cent of their working-life income. | Jessica Darmanin / Pawel Dwulit/GetStock

Carl?os Hernandez understands the restaurant business. The retirement business, on the other hand, is a bit of a mystery.

After a career spent working in other people’s kitchens, Hernandez, a native of El Salvador, is on the verge of opening his own restaurant. Inigo, in downtown Toronto, will offer takeout Portuguese churrasqueira-inspired fare—oven-roasted chicken, salads and brown rice. At 48, Hernandez felt it was time he became his own boss. So he’s sunk 15 years of savings into his venture.

While most financial advisers would argue against putting a lifetime of savings into a single, risky asset, the chef figures he knows his way around a kitchen counter much better than a stock portfolio. If the restaurant flops, however, he’ll be left with nothing.

“This is a gamble,” Hernandez admits of his foray into the notoriously fickle restaurant industry. “But it’s all I know. I’m not thinking in terms of a retirement plan.”

In fact, millions of middle-class Canadians don’t appear to be thinking very hard about their golden years. While basic government benefits such as the Old Age Security/Guaranteed Income Supplement and the Canada Pension Plan are sufficient to stave off abject poverty in old age, other forms of savings are required to provide for a reasonable standard of living. With pension plans becoming increasingly rare in the private sector, it’s up to RRSPs and other personal savings to make up the difference. But, like Hernandez, many Canadians lack the motivation or confidence to make their own investment decisions.

Evidence that a sizable portion of the Canadian middle class will not have the savings necessary to enjoy a comfortable retirement has the federal and provincial governments looking at major changes to Canada’s retirement system. One proposal, popular with unions and gaining acceptance from some academics, would see a doubling of CPP benefits to provide all Canadians with a secure retirement free from the need for personal savings. And yet critics contend the premiums required could have disastrous implications for the economy. Sorting out the pros and cons of big changes to the CPP is about to become a major political battle.

Jonathan Kesselman is a professor at Simon Fraser University’s School of Public Policy and a respected voice in the field of public finance. Recently, he took a close look at Canada’s retirement system and concluded the best solution is a substantial and mandatory enlargement of the CPP, what he calls “Big CPP.” Kesselman worries many Canadians will face a shock once they retire. To enjoy their golden years, most people aim for a retirement income of at least 60 per cent to 70 per cent of their working-life income. Unfortunately, recent studies suggest between a fifth and a quarter of the population will not meet this target. This group is mainly comprised of middle-income earners without workplace pensions and who lack either the confidence or the financial wherewithal to rely on RRSPs to make up the difference—particularly following the financial crisis that wiped out a decade of stock market gains. “A lot more people are going to find themselves unable to maintain their accustomed living standard in retirement,” he says.

Kesselman sees the CPP to be the best hope for shoring up the retirement of these Canadians. Currently, full CPP benefits, which start at age 65, replace 25 per cent of your lifetime working income, up to a maximum of $11,000 per year. A proposal from the Canadian Labour Congress would double CPP payouts to provide for 50 per cent income replacement—up to $22,000 in annual guaranteed retirement income.

Restaurateur Hernandez finds the prospect of greater government control over his retirement savings to be very appealing. “There are some people who have the discipline to save every month, every year. But most of us do not,” he says. Putting Ottawa in charge of a bigger slice of retirement decisions “would make saving much simpler.”

Of course, a massive enhancement in CPP benefits would necessitate an equally large hike in premiums. Employers and employees currently each pay a payroll tax of five per cent of wages toward CPP, for a combined premium of approximately 10 per cent. Doubling the benefits would push the required premium up to 16 per cent of wages.

Such an expansion would have significant ripple effects. Kesselman figures it would reduce demand on the federal government’s Old Age Security/Guaranteed Income Supplement programs for low-income seniors, which could save the federal government billions. And Canadians could stop feeling guilty about failing to save enough in RRSPs for their own retirement. On the other hand, more businesses would probably wind down their own pension plans, exacerbating the problem of disappearing private pensions. And the large increase in premiums would of course leave Canadians with less money to spend. Kesselman figures home ownership rates would decline noticeably as a result.

A Big CPP would also have a major impact on the labour market. Dan Kelly, senior vice-president of legislative affairs at the Canadian Federation of Independent Business, says employment rates are still precarious, and raising CPP premiums would make it harder for firms to hire new workers. “Such a big increase in payroll taxes would be very worrisome for small- and medium-sized companies,” he says. “Taking another six per cent out of wages is not insignificant.” And Kelly worries about the effect a Big CPP would have on the diversity of retirement savings. “This would require Canadians to put a lot more of their eggs into one big government basket,” he notes.

The contentious nature of a Big CPP has some experts looking for simpler solutions to the retirement puzzle. Jack Mintz is the head of the University of Calgary’s School of Policy Studies and author of a major study for the federal government on the retirement system. While Mintz agrees a modest boost to CPP benefits could soothe the anxiety of inexperienced or distracted savers such as Hernandez, he sees plenty of easier fixes to avoid the problems associated with a mandatory hike in CPP premiums.

Regulatory changes could allow several small firms to join to offer pension plans for their employees. Group RRSPs could also be made more attractive for small employers. And the federal Liberals are proposing a voluntary top-up plan connected to the CPP that would give Canadians additional government-managed pension coverage if they were willing to pay the extra premiums.

It will be up to federal Finance Minister Jim Flaherty to map out the future of the CPP, as any change to the plan requires the approval of at least two-thirds of the provinces, representing two-thirds of the country’s population. Alberta has already declared its opposition to a Big CPP and Quebec has been uncharacteristically quiet, which may suggest the odds of doubling the CPP are slim. “Any plan that involves a big increase in payroll taxes is not going to be an easy sell,” cautions Mintz.




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A savings safety net

  1. "Evidence that a sizable portion of the Canadian middle class will not have the savings necessary to enjoy a comfortable retirement has the federal and provincial governments looking at major changes to Canada's retirement system."

    What evidence is that, exactly? NO one has defined what the problem is or if it exists at all. That is imperitive before we push through looking for solutions. For instance, maybe increasing OAS is the way to go. It certainly doesn't make sense to increase CPP benefits for senior who don't qualify for much if any CPP.

    • OAS is welfare for old people. Increased OAS would represent a confiscation of wealth from one generation to another. This is why we have things like CPP so that people can self-fund their own retirements.

      • Yes, OAS is welfare but I don't mind helping out seniors that way. But not through CPP. If for no other reason than most poor seniors likely don't receive much if any CPP anyway. Two times $0 is still $0.

        • It helps rich old people. It's a really poorly designed scheme if the goal is to help low-income old people.

          • Agreed. OAS should not be paid to "rich" people. Sholdn't be paid to anyone with income over $25K.

  2. "One proposal, popular with unions and gaining acceptance from some academics, would see a doubling of CPP benefits to provide all Canadians with a secure retirement free from the need for personal savings."

    Lunacy. Increase CPP premiums which reduces the cash flow for the working poor so the wealthy retiree can get more CPP benefits? Really?

  3. "To enjoy their golden years, most people aim for a retirement income of at least 60 per cent to 70 per cent of their working-life income."

    Says who? That is a rule of thumb promoted by financial institutions trying to coerce customers into saving and investing with them. Surely we're not saying that someone earning $200,000 a year needs $120,000 to $140,000 to live on and if they haven't saved enough to do that, that we have to pony up are you? The only way to determine how much of your pre-retirement income you'll need in retirement is to figure out what kind of retirement you want and how much income/capital you'll need to have it.

  4. "Such an expansion would have significant ripple effects. Kesselman figures it would reduce demand on the federal government's Old Age Security/Guaranteed Income Supplement programs for low-income seniors, which could save the federal government billions."

    Reduce demand on OAS? What does that mean? The feds would be able to reduce the benefits? How will that help those that don't qualify for much CPP? If you want to save money on OAS, change the clawback rules. Now, someone earning less than $67,000 per year from other sources of retirement income gets FULL OAS benefits. In fact the clawback isn't complete until you earn $107,000. That means a couple could earn $212,000 and stil receive OAS. Since OAS is funded out of general revenues it's just like welfare. Think anyone already receiving that kind of income deserves our financial assistance?

    • No. Increased CPP benefits means higher incomes which means higher OAS/GIS clawbacks. People would be self-funding their retirements to a greater extent.

      • Increased CPP only means higher OAS clawbacks if your total income from OAS, CPP, pension, RRSP, etc is higher than $67K. That's where it starts to get clawed back. Total clawback doesn't happen until an individual's income hits $106K. This is the biggest travesty in our pension system. Why are we giving welfare to people earning $67K to $107K???!!! I bet if we we established a complete OAS cut off at, say $35K annual income, we'd save a bundle even if we doubled or tripled that OAS payment.

        • I'm not going to advocate for OAS, because it is madness. But that doesn't mean our pension system should be similarly illogical. Maybe if we improved CPP, OAS could be reformed.

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