A savings safety net

Doubling Canada Pension Plan benefits would provide all Canadians with a safe retirement, but it’s a risky plan that is set to spark a major political battle

A savings safety net

Hernandez has put 15 years' worth of savings into his new Toronto restaurant. Most people aim for a retirement income of 60 per cent of their working-life income. | Jessica Darmanin / Pawel Dwulit/GetStock

Carl?os Hernandez understands the restaurant business. The retirement business, on the other hand, is a bit of a mystery.

After a career spent working in other people’s kitchens, Hernandez, a native of El Salvador, is on the verge of opening his own restaurant. Inigo, in downtown Toronto, will offer takeout Portuguese churrasqueira-inspired fare—oven-roasted chicken, salads and brown rice. At 48, Hernandez felt it was time he became his own boss. So he’s sunk 15 years of savings into his venture.

While most financial advisers would argue against putting a lifetime of savings into a single, risky asset, the chef figures he knows his way around a kitchen counter much better than a stock portfolio. If the restaurant flops, however, he’ll be left with nothing.

“This is a gamble,” Hernandez admits of his foray into the notoriously fickle restaurant industry. “But it’s all I know. I’m not thinking in terms of a retirement plan.”

In fact, millions of middle-class Canadians don’t appear to be thinking very hard about their golden years. While basic government benefits such as the Old Age Security/Guaranteed Income Supplement and the Canada Pension Plan are sufficient to stave off abject poverty in old age, other forms of savings are required to provide for a reasonable standard of living. With pension plans becoming increasingly rare in the private sector, it’s up to RRSPs and other personal savings to make up the difference. But, like Hernandez, many Canadians lack the motivation or confidence to make their own investment decisions.

Evidence that a sizable portion of the Canadian middle class will not have the savings necessary to enjoy a comfortable retirement has the federal and provincial governments looking at major changes to Canada’s retirement system. One proposal, popular with unions and gaining acceptance from some academics, would see a doubling of CPP benefits to provide all Canadians with a secure retirement free from the need for personal savings. And yet critics contend the premiums required could have disastrous implications for the economy. Sorting out the pros and cons of big changes to the CPP is about to become a major political battle.

Jonathan Kesselman is a professor at Simon Fraser University’s School of Public Policy and a respected voice in the field of public finance. Recently, he took a close look at Canada’s retirement system and concluded the best solution is a substantial and mandatory enlargement of the CPP, what he calls “Big CPP.” Kesselman worries many Canadians will face a shock once they retire. To enjoy their golden years, most people aim for a retirement income of at least 60 per cent to 70 per cent of their working-life income. Unfortunately, recent studies suggest between a fifth and a quarter of the population will not meet this target. This group is mainly comprised of middle-income earners without workplace pensions and who lack either the confidence or the financial wherewithal to rely on RRSPs to make up the difference—particularly following the financial crisis that wiped out a decade of stock market gains. “A lot more people are going to find themselves unable to maintain their accustomed living standard in retirement,” he says.

Kesselman sees the CPP to be the best hope for shoring up the retirement of these Canadians. Currently, full CPP benefits, which start at age 65, replace 25 per cent of your lifetime working income, up to a maximum of $11,000 per year. A proposal from the Canadian Labour Congress would double CPP payouts to provide for 50 per cent income replacement—up to $22,000 in annual guaranteed retirement income.

Restaurateur Hernandez finds the prospect of greater government control over his retirement savings to be very appealing. “There are some people who have the discipline to save every month, every year. But most of us do not,” he says. Putting Ottawa in charge of a bigger slice of retirement decisions “would make saving much simpler.”

Of course, a massive enhancement in CPP benefits would necessitate an equally large hike in premiums. Employers and employees currently each pay a payroll tax of five per cent of wages toward CPP, for a combined premium of approximately 10 per cent. Doubling the benefits would push the required premium up to 16 per cent of wages.

Such an expansion would have significant ripple effects. Kesselman figures it would reduce demand on the federal government’s Old Age Security/Guaranteed Income Supplement programs for low-income seniors, which could save the federal government billions. And Canadians could stop feeling guilty about failing to save enough in RRSPs for their own retirement. On the other hand, more businesses would probably wind down their own pension plans, exacerbating the problem of disappearing private pensions. And the large increase in premiums would of course leave Canadians with less money to spend. Kesselman figures home ownership rates would decline noticeably as a result.

A Big CPP would also have a major impact on the labour market. Dan Kelly, senior vice-president of legislative affairs at the Canadian Federation of Independent Business, says employment rates are still precarious, and raising CPP premiums would make it harder for firms to hire new workers. “Such a big increase in payroll taxes would be very worrisome for small- and medium-sized companies,” he says. “Taking another six per cent out of wages is not insignificant.” And Kelly worries about the effect a Big CPP would have on the diversity of retirement savings. “This would require Canadians to put a lot more of their eggs into one big government basket,” he notes.

The contentious nature of a Big CPP has some experts looking for simpler solutions to the retirement puzzle. Jack Mintz is the head of the University of Calgary’s School of Policy Studies and author of a major study for the federal government on the retirement system. While Mintz agrees a modest boost to CPP benefits could soothe the anxiety of inexperienced or distracted savers such as Hernandez, he sees plenty of easier fixes to avoid the problems associated with a mandatory hike in CPP premiums.

Regulatory changes could allow several small firms to join to offer pension plans for their employees. Group RRSPs could also be made more attractive for small employers. And the federal Liberals are proposing a voluntary top-up plan connected to the CPP that would give Canadians additional government-managed pension coverage if they were willing to pay the extra premiums.

It will be up to federal Finance Minister Jim Flaherty to map out the future of the CPP, as any change to the plan requires the approval of at least two-thirds of the provinces, representing two-thirds of the country’s population. Alberta has already declared its opposition to a Big CPP and Quebec has been uncharacteristically quiet, which may suggest the odds of doubling the CPP are slim. “Any plan that involves a big increase in payroll taxes is not going to be an easy sell,” cautions Mintz.