“I’ve been there before
And I’ll try it again“
In response to the planted question of the day, Finance Minister Oliver announced that the Conservative government was open to adding a voluntary top-up to the Canada Pension Plan (CPP). He also announced that he’d be consulting with experts and stakeholders over the summer to see what might be feasible.
I can’t actually remember when question period was last used to announce a major change of government policy. But then, QP is so rarely used for policy-relevant discussions that it would be easy to miss a fleeting example when it happens.
Still, this is a really, really big about-face on policy.
See, for years, the Conservative government’s position has been that a voluntary add-on would “very much disturb the work of the CPP”, “put another burden on employers and dampen employment prospects of Canadians” and could “discourage Canadians from investing privately.”
The CPP is governed jointly by the federal and provincial governments. Any changes have to be agreed on by the feds and seven out of 10 provinces covering two-thirds of the Canadian population. Also, by law, any increase in CPP benefits has to be pre-funded (i.e.: we’re not allowed to pay for them as we go, the way we do current benefits). These are constraints deliberately put in place to make sure policy-makers are really committed before fiddling with one of the country’s largest social programs. And, once every three years, federal and provincial-territorial governments have a confab to talk about contribution rates, eligibility rules and other CPP-policy issues. We’re due for another such f/p/t review before the end of 2016.
Expansion of the CPP has been on the agenda of so many meetings of premiers and ministers of finance that I have genuinely lost track. “Expansion” has usually meant either an across-the-board increase in CPP benefits funded out of higher CPP premiums, or alternatively, a top-up that Canadians could opt in or out of depending on their own preferences. This latter option, the voluntary CPP, is the one that Oliver now says he’s open to.
Committing to consultations over the summer gives the minister some cover in advance of the next premiers’ meeting in July. Also, any roundtables or bilaterals with pension experts in the coming months won’t spark media speculation the way an internal Department of Finance study showing the economic benefits of CPP expansion did when it was released last year.
I’m not the least bit surprised that Finance has been looking at CPP expansion (in fact, for several years). Canada’s population is aging (though not as dramatically as many other OECD countries, see this OECD chart showing the elderly populations of countries since 1970).
The last detailed report from the chief actuary made clear that the CPP is sustainable, at current contribution levels, for at least another 75 years (well through the wave of aging Boomers). The program has been growing by about a billion dollars per year in recent years (the latest report to Parliament pegged the total cost at $37 billion, of which 76 per cent goes to retirement benefits), but administrative costs are quite low (a little less than three per cent of annual costs). By international standards, the cost of our public pension systems is pretty low, as this OECD chart shows.
Then again, we also spend a modest amount on our private pensions, and much less than many Nordic countries (where we might otherwise have imagined 70-year old men in leisure suits are living long and obscenely healthy lives on generous public pensions. See this OECD chart on private pension spending.)
But, somehow or other, most Canadian households have been managing OK in their retirement. In fact, reducing poverty amongst seniors has arguably been one of the greatest of our social policy achievements as a country. Between the universal OAS/GIS entitlement, the contributory CPP and voluntary savings in workplace pensions or individual accounts, most Canadians have been able to replace enough of their working-age income in retirement to ensure an adequate standard of living (and dependable income tax revenues… clears throat).
Much of the above, by the way, were conclusions that the Conservative government reached the last time it decided to take a hard look at retirement income adequacy. It hired professor Jack Mintz and commissioned papers from an impressive list of experts (including Kevin Milligan). You can read their 2009 reports here and here. [As an aside, I had and still have concerns about a focus on replacement levels without attention to dollar amounts: Is 100 per cent replacement of your working-age income OK if it still means living on just $17,000?]
But that 2009 review cycle begat the Pooled Retirement Pension Plan, not CPP expansion. Much to the chagrin of some provinces, (but not others), then-finance minister Jim Flaherty kiboshed the discussion on a bigger CPP, voluntary or not. It’s worth noting that two of the provinces who were then lukewarm to a bigger CPP (Alberta and New Brunswick) have since seen changes in government.
My insistence on worrying about very low-income Canadians nothwithstanding, the fact is that Canada is in an incredibly fortunate spot to be thinking about CPP reform. For now, the current systems (often referred to as the “three pillars”) for retirement income continue to be affordable and prevent the most abject deprivation. We could continue to truck along as we are for a while, or we could make choices to do better. But we don’t need to lurch into decisions out of fiscal or economic crisis … or political expediency.
Yes, only a third of Canadians in the workforce have a pension at work, but it’s not like there was some golden age of universal workplace defined benefit pensions. In 1976, only 43 per cent of men and 27 per cent of women had a workplace pension (see Robson). Yes, there’s been some shifting amongst employers toward the more cheap and cheerful defined contribution plans (that make no promises on what you’ll get, only what you put in). Households have been, in my view, managing this retirement income issue in part through social insurance to diversify and mitigate their exposure to risk. As they near retirement, if one spouse doesn’t have a pension, the other often will. Households have also been “saving” through other tax-benefited assets (like their home). Yes, savings rates are a shambles and yes, most of us are impervious to the steady increase in our RRSP and now (sigh…) TFSA room.
We’ve got defined contribution options aplenty. We’ve got tax-sheltered savings choices galore (please, read the preceding to the tune of the theme from Disney’s Little Mermaid. My 11-year-old will be giddy if you do). It’s defined-benefit choices (savings that promise a particular payout) that we’re shorter on. RRSPs, TFSAs, PRPPs and housing all promise a tax-sheltered defined contribution asset but make no promises about what you’ll have to live on in retirement. What they pay out is up to the markets (and if you have them reliably figured out please DM me because you can take over my tiny portfolio).
A voluntary, national defined benefit plan isn’t actually unprecedented. The CPP was created in 1965 (and rolled out in 1966) along with the Guaranteed Income Supplement. The minister responsible for introducing the CPP and GIS, had at one time been a federal public servant. While at Finance as a public servant, he’d chaired a working group on retirement income from 1949-51. That group’s work helped to bring in major changes to the original national pension that became what we recognize today as Old Age Security. The 1949-51 group was launched by Finance to deal with the aftermath of reforms to the Government Annuities Program. That program stayed quietly on the books until 1975. It still pays out modest amounts to a previous generation who voluntarily paid extra money (outside taxes) to the federal government so that they could have some additional assured retirement income, on top of their OAS/GIS and CPP.
That Ray Charles song ends in heartbreak. If you’re expecting CPP to be bigger and better by election day in October, I fear you’ll be similarly heartbroken. Whatever Oliver decides (or contributes to the CPC election platform) after he spends the summer looking like he’s consulting, the administrative changes will (and should) take some time and doing.
But yes, cynical politics aside, I hope we will look at CPP expansion again. We’ve been there before. So let’s try it again. One more time.