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The millions of Canadians with zero or very little pension coverage are going to have to wait a while for any relief.
The federal and provincial finance ministers met just before Christmas and decided now is not the time to enhance the Canada Pension Plan (CPP) and its Quebec counterpart, the Quebec Pension Plan (QPP).
Instead of acting, they decided the pension issue needs more study.
The facts, however, are well known.
As economist and pension expert Monica Townson wrote four years ago, in a study for the Canadian Centre for Policy Alternatives (CCPA):
“More than 11 million Canadian workers don’t have a workplace pension plan. And public pension plans — Old Age Security and the Canada Pension Plan — that everyone has, don’t provide enough for people to live on in retirement. To make matters worse, most Canadians are not making up for their lack of a pension plan by saving for retirement on their own. Less than one-third of people entitled to contribute to registered retirement savings plans (RRSPs) actually do.”
Back then, at the beginning of Stephen Harper’s majority government, the Conservatives were hostile to the idea of expanding the CPP/QPP.
And at least one industry, the Canadian financial services industry — bankers, investment brokers, insurers and their ilk — shared and nurtured that hostility.
Tax support to RRSPs and similar schemes is costly
Those powerful, private interests make huge profits from what Townson calls the third tier of Canada’s pension system.
The first two tiers are public.
Tier one is a combination of Old Age Security (OAS), which is guaranteed to all, though taxed back from those with higher incomes, and the Guaranteed Income Supplement (GIS), which is provided to low-income seniors on the basis of need.
Tier two is the CPP/QPP, paid on the basis of contributions during a person’s working life.
Tier three is composed of workplace pensions and individual savings through RRSPs and other schemes such as Tax Free Savings Accounts.
In 2009-10 Townson calculated that the total cost to the federal government of OAS benefits was under $28 billion. The GIS cost another $8 billion. CPP/QPP is paid to beneficiaries out of current contributions, so the only cost is a tax credit the federal government gives for those contributions: less than $3 billion per year.
On the private sector side, the net cost of tax subsidies to the third tier of the pension system cost the federal government $29 billion. Provincial governments, in effect, lost billions more.
The third tier mostly benefits upper-income earners, who have the means to take full advantage of the generous tax breaks of such measures as the RRSP.
And those who manage the third tier of Canada’s pension system are not enaged in an exercise in social altruism.
They are focused like a laser beam on their bottom line.
The Canadian companies that manage retirement investments in Canada have some of the highest management-to-expense ratios in the world, especially for mutual funds.
That’s not the view of some fuzzy-faced left-of-centre economists. It is what the provincial finance ministers, all 10 of them, concluded, five years ago.
U.S. social security is more generous than CPP/QPP
On the public sector side, Canada’s public pension system is niggardly by world standards.
No less an authority than the World Bank has said as much.
The U.S., to cite just one example, has had its social security system, equivalent to Canada’s CPP/QPP, since 1935, about three decades before the Pearson government in Ottawa and Lesage government in Quebec City founded the Canadian system.
U.S. social security’s maximum benefit is more than $31,000 per year.
The maximum CPP/QPP benefit in Canada is currently between $12,000 and $13,000 per year. Even if you add Old Age Security to that (at a maximum of less than $7,000 a year) the total is still far below what U.S. seniors receive.
In addition, a big piece of the third-tier system has been shrinking for a number of years. That piece is the workplace pension system.
Workplace pensions used to be, mostly, what are called defined benefit plans. That means retiring workers would receive a guaranteed income based on their annual contributions and number of years in the plan.
Today, the new norm is defined contribution. Retirees do not get a guaranteed amount. The plan invests their contributions and those of the employer and pays retirees a highly variable and unpredictable amount, based on the yield of the investments.
Defined contribution plans are much cheaper for employers, but, as a rule, far less generous for pensioners than the alternative.
Only about a quarter of working Canadians are now in defined benefit plans, and that percentage drops each year.
Many employers who have had defined benefit plans are phasing in the other kind. Long-serving employees get to keep the more generous defined benefit pension to which they have contributed for many years. But new and recent hires have to accept the decidedly less generous defined contribution system.
Enhancing CPP/QPP is the most reasonable option
These dreary facts all lead logically to the argument that the only viable solution to a looming pension crisis for millions of Canadians is to significantly enhance the public system.
The Canadian Labour Congress has long pushed for a doubling of CPP/QPP benefits.
Others have more modest ambitions, but would see the public, contributory pension system grow at a faster rate than the multiple decades the CLC recommends.
It would not be possible to enhance CPP/QPP benefits without a modest increase in contributions. But there is no evidence such an increase would discourage companies from hiring.
Monica Townson points to what happened in the late 1990s when the federal government decided to increase contribution rates significantly over a brief period of time:
“Beginning in 1997, CPP contributions nearly doubled over a five-year period during which the unemployment rate fell. The combined employer employee contributions rate rose from 5.6% of covered earnings in 1996 … to 9.9% in 2003 … During that same period of time, the unemployment rate dropped from 9.6% to 7.6% … “
Nor does Townson accept the oft-repeated argument that the CPP/QPP is a kind of payroll tax.
“Employer contributions to the CPP/QPP could be viewed as pension plan contributions in the same way as employer contributions to workplace pension plans or group RRSPs. Employment Insurance contributions, on the other hand, may correctly be considered payroll taxes since these contributions form part of government revenues and the EI fund is part of the government accounts. CPP/QPP contributions do not form part of government revenues. They are directed to the CPP Investment Fund [or, in Québec the Caisse de depôt et placement] and are used solely to pay benefits.”
And so it goes.
For a while it looked as though the new federal finance minister and his provincial counterparts would move forward quickly on the pension file.
Now it looks like they want to wait and prevaricate.
One does not get the impression that any of them consider the fate of millions of current and future retirees without adequate pensions to be an urgent or pressing concern.
They may have to feel some political pressure before they decide to act.
Photo: Prime Minister of Canada/flickr
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