Improve Canadian pensions now
Across the country Canadians are discussing the ways to and benefits of improving Canadian pensions. The majority of informed opinion strongly favours expanding the universally accessible, public Canada Pension Plan (CPP) and increasing the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The influential minority, mostly those in alliance with the private financial services sector, favour continuing reliance on private sector solutions. Opinions aside, the hard evidence strongly favours expanding the CPP rather than continuing to rely on the private sector, whose results have paled in comparison to the results produced by the CPP.
Now 45 years old, the CPP has proven itself to be a very efficient and well managed universal pension plan available to all employed Canadians. Earned pensions are based on accumulated years of payroll contributions, paid on a 50/50 basis by employees and employers. No tax money goes into the CPP. Despite its efficiency CPP pensions are simply too low to provide a reasonable standard of living, due primarily to the restrictions placed on its initial design.
Prior to the enactment of the CPP in 1965, there was a lively debate between labour and progressive political voices, who argued for a more compehensive public plan, and the financial services sector and conservative voices who argued for a more limited public plan. It was, and is, generally agreed by all sides that a person needs to set aside approximately 7% of their income to create a pension which can replace 70% of their working income and ensure that their standard of living can be carried into retirement.
The financial services sector argued that, while the public CPP pension payouts would be modest, restricted to replace just 25% of the Year’s Maximum Monthly Pensionable Earnings (YMPE - currently set at $47,200), the remainder of the necessary 35% would, they enthused, be made up by the growth of workplace pension plans and the expansion of private investment vehicles such as RRSPs and mutual funds. Those monies, they said, would be competently managed by the private financial services sector, for reasonable fees and a profit, of course.
History has proven that the rosy projections of the financial services sector and their political friends were wrong. Today, only 38% of Canadian workers are covered by workplace pension plans and that number is falling, and unlike the CPP, when an employee changes jobs, for whatever reason, their workplace pension plan does not follow them into the new job.
Only 31% of Canadians who are eligible to contribute to RRSPs can afford to do so, and a high percentage of those who do contribute are higher income earners. Yet the average amount held in Canadian RRSPs is just $55,000, enough to produce only about $250 per month at current rates.
While average Canadians haven’t done that well with RRSPs, the financial services sector has done very well. In the now 40 years of tax incentives to encourage Canadians to invest in RRSPs, totaling some $18 billion, almost half of that amount has gone to pay management fees. The story is much the same for mutual funds, which even fewer Canadians can afford to invest in. Canadian mutual fund management fees are among the highest in the world, eating up almost 2% of assets.
Contrast this to the CPP, which has one of the lowest percentage of costs going to management and administration of any plan in the world. The CPP Investment Board’s investment management costs were just 0.17% of assets. In the world of financial management, size matters, and simply put, the CPP delivers more bang for the buck through prudent managing and investing our collective pension savings, and isn’t that what Canadians want and deserve? Incidently, the CPP Investment Board today manages some $127 billion and is a major asset to Canadian business seeking competitive capital investments and is therefore also good for business.
So where does this leave Canadian seniors? As a result of the original limitations placed on the CPP, coupled with the failure of the private sector to make up the difference, it means that today too many Canadian seniors now live in poverty. Most Canadian agree that this is wrong and must changed, but how?
There are a number of comprehensive proposal being considered, but one that deserves particular attention is the one advocated by the Canadian Labour Congress. It is a modest proposal to double CPP benefits, to moving the YMPE replacement rate from 25% to 50%, phased in over 7 years, thereby doubling CPP pensions, for future retirees.
They are also proposing a 15% increase in the OAS/GIS for current and future retirees to help alleviate poverty for Canadian seniors whose lifetime earnings were modest. The OAS/GIS is paid out of federal taxes. Will this cost us more money?
Yes, it will. And so will all other plans to improve Canadian pensions, but no other plan is capable of delivering a better long term return for the money invested than expansion of the CPP and upgrading the OAS/GIS. For more information visit www.canadianlabour.ca/home.
More money invested in raising the incomes of Canadian seniors is a boon to the economy. Not only do seniors pay taxes to help pay for the services we all want and need, but seniors with disposable incomes create jobs for younger Canadians servicing their needs, and in turn create a stronger tax base to support our important social programs such as health and education.
Some things never change.
As support for expanding the universally accessible, public Canada Pension Plan grows, the financial services sector is once again arguing for renewed reliance on workplace pension plans and investment vehicles such as RRSPs and mutual funds. Despite the fact that over reliance on private sector options has failed the vast majority of Canadians over the last 45 years, the financial services sector has done quite well for themselves and doesn’t want to lose control over funds that would go to the CPP in an expanded public plan.
The question we, as Canadians, have to ask is: what do we want for ourselves, our children and our children’s children?
Related news from The Toronto Star:
Two dozen protestors barged into Finance Minister Jim Flaherty’s office in Whitby Friday as a backlash against his latest pension proposal gathered force.
“We’ve been betrayed,” Ontario Federation of Labour President Sid Ryan said as he waited with other labour and community figures in Flaherty’s constituency office.
The group, which was demanding an audience with the finance minister, was angered by the Harper government’s surprise decision to opt for a private sector solution to the country’s pension problems rather than enhancing the Canada Pension Plan (CPP), as Flaherty had previously proposed.
Unlike the CPP, the new Pooled Registered Pension Plan (PRRP) would be a voluntary scheme administered by the financial industry.
Ryan said the voluntary plan unveiled Thursday would do little to help solve a situation in which nearly one-third of Canadian families lack any pension savings.
“What Flaherty is proposing is a glorified savings plan – a gimmick to get the issue of pensions off the front pages,” Ryan said in a telephone interview.