Ottawa in push for pooled pension plans -

Ottawa in push for pooled pension plans

Federal government wants Canadians to save more for retirement


Ottawa introduced legislation on Thursday to create pooled registered pension plans for employees and employers in small businesses, as well as the self-employed, the Globe and Mail reports. The move is aimed at encouraging Canadians to save more for retirement. Although participation in pooled pension plans is voluntary, the Harper government is expected to including measures that would allow companies to automatically enroll new employees into these programs. Though there will be an opt-out option, auto-enrolment would raise participation.

The Globe and Mail

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Ottawa in push for pooled pension plans

  1. Instead of imposing the additional overhead on employers, why not just increase CPP contributions by the same dollar value?

    • CPP changes would have to be across-the-board; otherwise, it would be a nightmare for the gov’t to administer.

      • Yup, I knew that.

        I’m advancing the case that having EVERY current CPP contributor contribute a bit more to the CPP – stipulating that this would entitle EVERY current CPP contributor to higher future benefits – would be a more effective way of helping the significant portion of current CPP contributors who have no other pension in place achieve a more adequate pension benefit by their retirement date.

        You correctly point out that CPP reform targetted solely at folks without a company pension would be a nightmare to administer, which is exactly the concern I have about this new plan.   :-)

    • The problem there is that CPP is currently taken from the bottom $47,000 or so of income. After I hit $47,000, my CPP deductions stop for the year. Therefore, a hike in contributions represents a large tax increase on the bottom $47,000 of income, and nothing on higher income. Personally, I would not be bothered by seeing a flat CPP contribution applied to all incomes, both employer and employee contributions. They could reduce the upper income tax brackets by a few points so that it would not represent a tax increase. 

      Yes, it would mean shifting the CPP from a true pension plan to more of a social welfare plan, but so what? Those with inadequate pensions will be supported by the taxpayers somehow anyway, through GIS or other means. Why not recognize that and just make payroll taxes a flat tax on all income? 

      I always find it odd how those who freak out at the suggestion of a flat income tax are perfectly fine with a regressive payroll tax that is only levied on the bottom $47,000 of income (minus a paltry $3500 exemption). How about a flatter (not completely flat) income tax and also a flat payroll tax that actually taxes higher salaries the same as lower salaries, instead of completely exempting the higher income? As it stands right now, some of the highest marginal rates are paid at the $40,000 to $47,000 range of income, where a person is still paying EI and CPP premiums, and at the same time they’re in the second marginal income tax bracket. That marginal rate is even higher when CCTB and GST credit clawbacks are counted; well in excess of 60% in some cases. 

      • In no particular order:

        –  by flat tax, you mean a single rate tax?  Technically a flat tax is a head tax
        –  I’m not completely against moving towards a single rate tax, although (by a factor of at least 10) I’m much more in favour of removing as many of the deductions as we can, which would allow some combination of increasing the basic personal exemption amount and/or decreasing all 4 of the existing marginal rates
        –  I’m actually suggesting that ‘we’ estimate the increased administrative burden that would be imposed on businesses by this new pension option, as a percent of total payroll, and then increase the employer contribution amount by exactly that amount – no change to employee contribution rate
        –  got a link that details those marginal rate calculations?  I’m interested to see how the basic second rate of 22% becomes 60% in some cases.

        And, btw, I appreciate the detailed response.   :-)

        • I’m going by a presentation by Jack Mintz that I attended a few years back, where he showed marginal rates in excess of 80% (yes, 80, not 60) in some provinces. That marginal rate applied only to a very narrow band of income however, and drops off again once your EI and CPP tops out. It’s not just the 22% fed rate, you’ve got a middle provincial rate that can range anywhere from 9% to much higher. Here in Ontario, it’s 9% and change. Now you’re at 31%. Add in 5.9% CPP and another 1.8% EI, you’re at 38.5%. Now add in a simultaneous clawback rate of your GST and your CCTB credits (if you’ve got kids), both at around 25% or so. You’re looking at 88.5%. There are non-refundable tax credits claimed against both the CPP and EI premiums, which reduces the marginal rate to around 80% or so.  

          Mintz recommended a pooling of the refundable credits, and a single clawback rate applied to the pool. That way you would not have a concurrent claw back of two different credits (e.g. CCTB & GST), which means 25% instead of 50%. Keep in mind, it never feels like an 80% marginal rate at the time, as your CTTB & GST credits for next year are determined by your income this year. So the ultimate marginal tax does not kick in until the following year. Which is why there isn’t the pressure on government to do anything about it. Most people don’t realize the problem. They just notice that for some reason they don’t seem much better off at $45,000 in income than they did at $38,000 two years ago. CPP and EI taxes are already single rate taxes. There are no brackets. However, they cut off in the mid-40s, so they are as close to head taxes as we’re going to get. Ditto for provincial health premiums, which top out at some level of income. These types of taxes are the most regressive taxes extant. I too would favour a simplifying of the tax code, with a single rate of tax being applied to ALL income, including dividend, capital gains, interest, etc. Along with, of course a massive personal exemption at the very bottom. Perhaps a second higher bracket above, say 100,000 would be desirable.  Instead we have a graduated system that taxes labour income more heavily than passive income, which is just silly. I used to believe there were good reasons for this. (Encouraging savings and investment, blah blah blah, etc. etc.) Not anymore. Certainly we could include an inflation adjustment when calculating capital gains, which would remove the phantom income caused by inflation, and just tax capital gains as regular income, instead of allowing a 50% deduction. 

          • I had paragraphs in that response. Honest I did. They just disappeared. 

  2. Yes, deduct more and tax back the extra from those who have. Speaking of taxes, is Canada on the ball more than Greece or are they letting their friends off the hook?

  3. This is not  a pension plan but rather promoting for access to discount investment firms.  This is very dangerous as are undefined benefit plans since these assure uncertainty of returns due to market vagaries. In other words, those who put money into these plans risk all if the markets tank. And this is happening on a regular basis. Workers will be united when they get screwed by the investment firms. Hoorray, another victory for the Neo-cons

    • Defined benefit plans are also uncertain. You can declare certainty, but that doesn’t mean you have it. A defined plan is no better than an undefined plan if the markets head south and the pool of money to pay out the pensions simply isn’t there. Ask the Greeks. As Nortel employees if it would have made a difference. Their pension plan disappeared, seized by creditors. Defined or not, no money in the plan means no payout. “Defined” just pretends otherwise. 

      I agree the financial advisors and investment houses are parasites who take home a paycheque regardless of whether your investments provide you with a decent return or not. I’ve watched my own parents get soaked repeatedly, with much of their retirement funds simply swallowed up by the mutual fund industry and their salesmen. It took me a dozen years but I finally convinced them to get out of mutual funds entirely. They’ve donated enough to their friendly local advisor (i.e. salesman) and his masters. 

      • Defined benefit plans are uncertain in that companies are notorious in not fully funding them and making sure that the money was set aside. Companies have a curious habit of ‘extracting’  the so-called surpluses when in fact these had been generated by revenues accrued through the pension plans. Companies when coming to a negotiated agreement with its employees should be legally bound to assure that the pension plans are funded to the limits that have been promised by the employer and this money set aside untouched even in the eventuality that the company faces financial difficulties. The problem is that corporations have abused the intent of these negotiated settlements and leave the employees high and dry. Workers remain unprotected and the bankruptcy laws are not favorable to the employees since they are not considered creditors. 

        • Agreed there must be more protection for pension plans. What happened at Nortel was unacceptable. And the government’s response – “we can’t make pension funds off limits because then companies would not be able to borrow as much and that would put them at a competitive disadvantage” – is ludicrous. Maybe they shouldn’t be borrowing so much that bankruptcy becomes the only option soon as they hit a rough spot? If they need to use the pension plan as collateral, then perhaps that borrowing shouldn’t happen. Yes, it will mean less business expansion in some cases, but said expansion seems to blow up with alarming frequency. 
          Another issue altogether is the management of pensions. Pensions should be SAFE. That means most of the future benefits are going to come from contributions made today, plus a small annual gain over and above inflation. Expecting a fund to return 6% or 8% long term is a recipe for forcing those funds into investments that are simply too volatile and risky. The models can’t possibly account for this risk, thus we have pensions that are inadequately funded. 

          • Sir, 

            You are far from being a RR on this one. 

          • The RR moniker was chosen in jest more than 7 years ago.I just got attached to it. It was never meant to be an accurate portrayal. The picture, alas, is an accurate likeness. :)

  4. For one large group of wage earners, the ones in the first(lowest) tax bracket, it makes little sense for them to contribute to RRSP’s. Sure the government wants them to save more for retirement, that way, they will get less from the GIS program when they reach 65, not that there is anything wrong with that as it would help balance the budget a bit. But If I were a $15/hr wage earner, I would not put whatever extra cash I might have in a RRSP style program.

    • Agreed. Even at higher tax levels, RRSPs are a trap. They are basically the only tax deferral available to salary earners, but the government knows it will get its hands on the money someday. This isn’t a bad thing in itself, as it will provide for some tax revenue when demographics are a lot less favourable than today. 

      BUT…. RRSPs are very restricted in what we can invest in. Basically, we are forced to play casino capitalism in the market if we want any sort of return at all. Certainly interest rates don’t allow for any sort of safe appreciation. They don’t even allow your savings to keep up with inflation. Therefore, RRSPs, while they have some merit, are basically a gift to the financial industry. I’ve watched my parents get hosed repeatedly by mutual funds, and much of their retirement savings are simply gone. Their original advisors (i.e. salesmen, actually mutual fund pimps) seem to be retiring in style though. It makes me sick. 

      An RRSP does not allow one to invest in one’s self, except for the Life Long Learning Plan, which allows you to “borrow” from your RRSP for tuition. You can’t use it to start a business or to pursue opportunities outside the very narrow and increasingly volatile world of paper securities. It’s a trap that many Canadians will pay dearly for. 

  5. Perhaps Ottawa should try running a balanced budget for a couple of years before “encouraging Canadians to save more for retirement.”  Leading by example and all that.