The Ontario Liberals’ pension proposal needs work

The math behind the “million jobs” platform of the Ontario Progressive Conservatives has dominated economic discussion in the Ontario election campaign now under way. Those PC job claims deserve scrutiny, but we shouldn’t let other policies with greater potential impact on the lives of Ontarians escape our attention. For example, take the Ontario Liberal Party’s proposed Ontario Retirement Pension Plan (ORPP). The ORPP would shift about $3.5 billion per year from today’s workers into an investment fund worth tens of billions of dollars, and eventually pay out billions of dollars of pension income. I don’t see any other policy of this scale in the party platforms, so the ORPP is worth a much closer look.

In 2013 at the federal level there were serious discussions about expanding the Canada Pension Plan (CPP). During that period, I wrote a paper with Tammy Schirle examining the CPP expansion proposals. Much of what I learned about the CPP expansion can be applied to the Ontario Liberals’ proposed ORPP. Overall, there are a few positives about the proposal, but also some serious shortcomings. Below are three ways in which the ORPP heads in the right direction and three ways it is veering off-course.

Three ways ORPP is on the right track

1. Expanded coverage for upper-middle earners:

The proposed ORPP expands coverage for middle earners. Currently, the CPP covers earnings up to $52,500. The ORPP would cover a bigger range—up to $90,000 in earnings. This is a good move because the best studies of retirement income suggest those in middle-income ranges have the highest percentage of people who have retirement income that doesn’t adequately match what they made when working. That evidence says that around one-third to one-half of Canadians without a workplace pension look to have retirement incomes less than 60 per cent of their worklife incomes. Expansion of coverage for middle and upper earners can improve those numbers.

2. Opt-out for those with existing employment-based pensions:

According to the 2014 Ontario Budget, those with a “comparable workplace pension” can opt out of the new arrangement. This is beneficial because it focuses the new program where it is more likely to be needed—those without a workplace pension plan. This makes the ORPP a more nimble operation than the large universal CPP expansions that were under consideration

3. Gradual phase-in:

The ORPP proposal includes a phase-in of coverage over a two-year period, in order to ease any problems with higher payroll taxes on the labour market. I share the views of other economists that any short-run phase-in effects should not be given large weight in the analysis. For a 1.9 per cent payroll tax, a two-year phase-in seems sufficient.

Three ways ORPP is veering off-track

1. Patchwork pensions

One advantage of doing expansions through the CPP is the national portability of the pension, which enhances the mobility of labour across Canada. Doing pension expansion one province at a time means this advantage is not fully captured. Some argue that waiting for the Conservative government in Ottawa to make CPP expansion happen is foolish. Or, Ontario’s ORPP could act as a positive experiment in federalism (like Medicare in Saskatchewan), and lessons could form the basis for later national expansions. Both of these arguments are sensible, but do not obviate the fact that the ORPP will for now be Ontario-only and hamper rather than enhance national labour mobility.

 2. Investment policy

One keystone of the success of the Canada Pension Plan Investment Board has been the independence of its investment policy from politically motivated investments. This independence is legislatively locked in, and gives Canadians some confidence their retirement funds won’t be frittered away on politically motivated projects.

For the ORPP, there is conflicting information in the Ontario Liberal platform. The platform says both “the ORPP will be publicly administered at arm’s length from government” and that “the ORPP will be able to invest the premiums it collects in Ontario businesses and infrastructure.” These seem to be in conflict. For the ORPP to be independent and have an investment mandate like the CPP, it is not possible to promise the ORPP will invest in Ontario businesses and infrastructure. Any appearance of a relaxation of independence should be monitored with vigilance.

 3. Coverage of low earners

The ORPP appears to start its coverage at low earnings levels. The 2014 Ontario Budget says that “earnings below a certain threshold would be exempt from contributions, similar to the CPP.” The current CPP exemption level is annual earnings of $3,500.

While the Ontario Liberal documents all say that they would consult on where to set this lower limit, the numerical examples they provide in the budget and platform appear to assume the lower earnings level would be somewhere close to the CPP’s $3,500. That’s a problem.

Expanding coverage of low earners is a poor choice. That’s not because lower earners are undeserving of secure retirements. It is because other policies are much better placed than the ORPP to deliver those secure retirements to lower earning workers. The ORPP is contributory—you pay for what you get. If you want to give more to lower earners, you can’t use a contributory pension like the ORPP to get you there.

With existing federal benefits like Old Age Security and the Guaranteed Income Supplement, low earners typically do as well in retirement as when they are working. So, for those who are currently struggling in the labour market with lower earnings, the ORPP would take money away from them now when they are struggling and not give it back to them until retirement when they are struggling less. It would be better if no one has to struggle at all, but forcing people to save more through the ORPP at times when they are doing poorly is not a great solution to that problem of lifetime low earnings.

But it gets even worse: those who are low lifetime earners often receive the Guaranteed Income Supplement in retirement. These federal benefits go down as you have more retirement income from other sources. The ORPP benefits received in retirement will reduce these other government benefits by about 50 cents on the dollar. The result is that these lower earners will only receive half of their ORPP contributions back when they retire because of these pension clawbacks. They pay for a whole pension and receive only half back.

For these reasons, any ORPP expansion that includes lower earners is not just unnecessary, but acutely perverse in its impact on lower earners.

It is possible to design an ORPP that avoids this serious pitfall. During the CPP debates in 2013, several proposals came forward that expanded coverage only for middle and higher earners for precisely the reasons I outline above. If the ORPP is implemented, the earnings coverage threshold needs to be reconsidered.

Is the ORPP worthwhile? 

It depends on two things.

First is whether middle and higher earners who are currently not saving enough for retirement really need government to help them out. These middle earners are unlikely to end up in abject poverty in their older years, but arguably could be made better off with an intervention. Is the role of government only to avoid abject poverty, or should government take a stronger position in the savings of Canadians? That’s a good question, and your answer to the question will reflect your views on what government ought to do in our society.

The second pivotal question for the worthiness of the ORPP is whether the coverage of low earners can be better designed. Given what I’ve seen, I think the ORPP proposal needs some more time in the policy workshop before it fully realizes the potential benefits of pension expansion.