Making sense of Joe Oliver’s new CPP consultations

What’s behind the finance minister’s notion that Canadians might make ‘voluntary’ contributions to the CPP? Pension expert Keith Ambachtsheer explains



Without offering much detail about what he has in mind, Finance Minister Joe Oliver said today the government will conduct some sort of consultation process on the idea of letting Canadians boost their retirement savings by making “voluntary” contributions to the Canada Pension Plan. Keith Ambachtsheer, director of University of Toronto’s Rotman International Centre for Pension Management, spoke to Maclean’s about the idea shortly after Oliver made the bare-bones announcement.

What did you think when you heard that the finance minister is going to look into a new voluntary component to the CPP? 

Well, I don’t consider myself to be an expert on politics, but this seems to me to be a very political statement. I think the CPP is a good brand, and I think some of the provinces and the opposition parties use it to their advantage when they talk about pension reform. This strikes me as a very easy way for the Conservatives to kind of get on-side with the brand without committing themselves to anything.

Is there a serious issue with pensions in Canada that needs to be addressed?

There is. It’s not here right now but it could easily evolve over the next few decades. It’s that the majority of private-sector workers do not have an employment-based pension plan. They are basically left to themselves as to how they build up a pension in addition to Old Age Security and CPP. As a result, two things happen. They get sold retail mutual funds at very high fees, which is not in their interest, or they don’t think about it until it’s too late. So I do think there’s a looming problem for middle-income, private sector workers down the road.

Is the basic problem that a large swath of the population just won’t save as much as they need to, unless there’s some savings mechanism that they really don’t need to think about?

That’s where the research is and where I am on this. Inertia is a big human issue, for all of us. And I think saving for retirement naturally falls into that bucket. Younger people, even middle-aged people, have more immediate concerns. So something that’s automatic is a good way to go.

So when the finance minister muses about a voluntary CPP, how would that differ from, say, just encouraging people to invest more in their Registered Retirement Savings Plans?

You say “CPP” rather than “RRSP,” and that rings differently. The bigger question is, What would Canadians be buying with this additional contribution to the CPP? It’s either just another way to do an RRSP, managed by the CPP Investment Board, or somehow you buy yourself an additional pension. The second route is hugely problematical. How do you turn that additional contribution into a future pension benefit?

Why would it be any different than the existing standard CPP benefit?

The current CPP is largely a pay-go plan. In other words, most of the money that is used today to pay pensions comes out of pension contributions. The CPP Investment Board is still cash-flow positive; it won’t start contributing to keeping the CPP on a level keel for another 10 years or so.

But there’s this rule we put in place as part of the CPP reform of the late 1990s that any future benefit must be fully pre-funded [out of returns on invested CPP funds]. So if you and I put a dollar extra in, what does it buy us? The biggest driver is the rate of return. Do you know what that’s going to be?

I do not.


What would you do if they let you design whatever reforms you see fit?

I would do what I’m advocating that Ontario do. They took the initiative last year by saying, “We can’t get anything done nationally so we’re going to create the Ontario Retirement Pension Plan.” The best way to make a supplementary plan like that work is to make it as simple as possible, and start it off as an incremental retirement savings plan that runs at low cost. It’s generating that return and not paying too much in terms of expenses that ultimately generates the pensions.

What do you think of a system like the one they have in Britain, which automatically deducts a supplementary pension contribution, but allows an individual to opt out?

It’s brilliant. It’s absolutely the way to go. You’re really arbitraging nicely across two concepts. One is the whole inertia thing. But, two, if you really don’t want to do this, it lets you opt out. This has been operational on scale for three years now in the U.K. It’s now going and they do have this enrolment requirement with an opt-out option. What’s the opt-out rate? Eight per cent.

Is that how the Ontario plan will work?

I’m trying to persuade them, but I’m not the only voice.

There already are so many incentives to save—RRSPs, education savings plans, tax free bank accounts. Is all this prodding Canadians to think ahead succeeding or failing?

There’s an issue for the people who save and another for the people who don’t. For the people who have this inertia problem, the public policy challenge is: How can we help them do what they are going to wish they had done if only they had started in time? And then we do have a significant number of individuals, not members of employment-based pension funds, who are saving, but my concern for them is you can’t pay 2.5 per cent fees on the mutual funds in your RRSP and get anywhere near where you hope to go.


Making sense of Joe Oliver’s new CPP consultations

  1. Business will just look at this as another tax, and may just decide to lay off more employees, rather than contribute to it. It is just another tax(pig), with lipstick on it, another sign that possibly the Trudeau plan may be hurting, and that’s all is left is to pander. After the 3 party ads this week being released, the only thing I remember out of the 3 ads, was, families will receive $2500 more each year, tax free, hmm, sounds good to me, fairness beats division.

    • First, so far as I can tell, no one has even suggested asking businesses to contribute more to the CPP, so your first point is moot. Second, if the “Trudeau plan” is hurting, why would the Tories bother with naked pandering? Third, If families getting a $2,500 tax break is good, what’s “bad” about giving them the option to voluntarily contribute that money towards an increased CPP retirement benefit if they choose to do so?

      It seems to me, with due respect, that your comment is a string of non sequiturs.

    • As someone who will have no employer pension of any kind, and will have to rely on my RRSPs (and CPP and OAS) for retirement, I am *very* interested in hearing more about this.

      Hopefully, it’s not all smoke and mirrors. And, maybe it will prod the LPC and NDP to think about the issue.

  2. CPP: the government is letting too many employers not pay their share. This means that workers are paying both parts of the contribution, employee and employer. This is a hardship that many low-salaried workers cannot afford. How does this happen? Some employers are using a sleazy ruse: they call their employees “contractors”, which means they are self-employed. Universities are among the worst offenders, although the Star had a story recently on a cleaning company that was using the same nasty trick. Crack down on these employers before you look at raised contributions.

  3. Well, I suppose if Carpet Bomber thinks it’s a tax, then why don’t we just borrow the money, like all the other social programs. We can pile it on to the $600 billion debt we’re handing down to our children. No generation in the history of democratic governments, like those retiring now have handed down such a burden of debt that’s going to handcuff their futures. But hey why should they care? They see the world through the rose coloured lens of those halcyon ’50 & ’60. The same generation that has the extortion threat out every election time, :Give seniors what they want or we’ll kick you asses out”. To the point now that at one end, seniors are having to go to food banks and at the other, a senior can an earn up to $68,000 and still get a $550 monthly OAS welfare check from the government. (about 350,000 of them to be exact, reference Stats Can CRA website).

  4. Don’t worry your little Canadian minds, the Conservatives will only ‘muse’ about this until the Oct. election.

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