Will 2014 be the year of the duelling pension plans?
Last month, Ottawa and the provinces failed to agree on what, if anything, needs to be done about the Canada Pension Plan. Led by Prince Edward Island, the provinces have argued for an expanded CPP to protect Canadians who fail to save enough for retirement. The Harper government has rejected such plans as dangerous to the economy. Kevin Sorenson, minister of state for finance, claims the payroll tax hikes necessary to fund the provinces’ plan “could kill between 17,000 and 50,000 jobs.”
Since changes to the CPP require both federal and majority provincial approval, this difference of opinion has produced a deadlock. Griping that Ottawa’s position is an “unfortunate stall tactic,” Ontario Finance Minister Charles Sousa is now vowing “a made-in-Ontario alternative to protect Ontario workers in their retirement.” His P.E.I. counterpart is thinking along similar lines, creating the possibility of competing public pension plans springing up coast to coast.
It’s a poor start to the new year. Rather than sniping at each other and duplicating programs, Ottawa and the provinces ought to agree on the most obvious flaw in CPP as it is currently constituted and fix that.
To deal with the provinces’ complaints first, the problem to be solved by boosting CPP is neither clear nor pressing. Low-income seniors are already well served by the current system of CPP plus Old Age Security (OAS) and the means-tested Guaranteed Income Supplement. The rate of poverty among Canadians over 65 is the lowest of all age groups tracked by Statistics Canada; those seniors who are poor tend to be widows ineligible for CPP. Boosting regular CPP payouts will not provide a solution to their situation. At the other end of the spectrum, wealthy Canadians obviously need little in the way of additional assistance from federal or provincial governments for their retirement. That leaves the middle class.
As attractive as it may be for politicians to fret about the comfort of the middle class, the vast majority of this group is also saving plenty for their retirement years. At issue is a small share—perhaps 20 per cent—who lack a workplace pension, do not own their own home and are not putting enough aside in RSPs for their golden years. While these folks may not face actual poverty in their old age, they are unlikely to enjoy an income of at least 70 per cent of their working-age earnings, the standard measure for a comfortable retirement. The question facing Canadian policy makers is how to help them without creating a massive new pension bureaucracy or job-killing tax.
This brings us back to the federal stance, and the possibility for common ground.
In 2012 Ottawa raised the age of eligibility for OAS from 65 to 67. This move, to be phased in over the next 15 years, was popularly construed to mean Canada’s retirement age had increased. In fact, the age for accessing CPP was not altered, since this requires provincial approval.
There is tremendous logic in updating the retirement age. Fifty years ago, when the retirement age was set at 65, life expectancy was 72. Today it’s 81. Current problems with the sustainability of public and private pension plans are largely driven by the inexorable lengthening of years spent in retirement and the imbalance between the working and non-working portions of the population. Nearly every developed country in the world has already raised, or is in the process of raising, its public pension retirement age to 67 or 68. Canada, on the other hand, has two retirement ages: 65 for CPP and 67 for OAS. This makes no sense.
Many of the problems identified by the provinces could be solved by simply aligning the CPP with OAS. (And with a similar phase-in period.) The pension plan itself would be placed on a more solid financial footing, which could allow for small enhancements aimed at particular disadvantaged groups, such as survivor benefits. More importantly, those two extra years of income later in one’s working career would greatly improve the opportunity for retirement savings, particularly for those middle-income earners without workplace pension plans who’ve become the focus of the provinces’ attention lately.
Raising the CPP age also reinforces the proper notion that retirement savings should primarily be a private responsibility, especially for those who can afford it. While the state has a role in protecting older Canadians at the bottom of the income range, this duty does not necessarily extend all the way up the ladder. If middle-class Canadians find they need to save a bit more to ensure they can enjoy a long and comfortable retirement, working another year or two seems like a good place to start.