Analysis

CPP plan won't help savers or stop the pension crisis: Don Pittis

The federal government's consultation on a voluntary top-up of the Canada Pension Plan looks as if it was built to be killed. Without complex rule changes, extra payments may damage a system admired around the world and make little tax sense. Worse, it still won't solve Canada's pension deficit, Don Pittis writes.

Extra CPP payments smack of political smokescreen, without providing solutions

In one of Aesop's Fables, the ants save for the long winter ahead while the grasshoppers play. Under the new Canada Pension Plan consultation proposal, the ants among us will have one more voluntary way to save. But it may not be their best option. (Associated Press)

If as many suggest, the government's latest plan to expand the Canada Pension Plan is pure politics, perhaps the details don't matter.

But based on the little we know so far, you should not expect the new scheme to solve what many worry is a coming Canadian pension crisis. 

At first glance, the plan is enticing, especially after CPP's recently announced truly fabulous return on its (our) investments.

The plan, famous for being sustainable over the long term and managed by competent professionals without political interference, made a stunning 19 per cent return this year.

The Conservatives aren't saying it, but that huge return — better than almost anyone is earning from their private sector investment accounts — may be one reason the government abruptly changed direction and announced what appears to be an ill-thought-out way to let Canadians top up the CPP.

Magnificent returns

The magnificent CPP return suddenly made plans by the NDP and Liberals to expand CPP look enormously smart.

In fact, it may have made some voters think that those two parties had better financial judgement about what is best for Canadians than the Conservatives, who have repeatedly and stubbornly pooh-poohed the idea.

While the Conservatives can now boast of a "me, too," proposal to extend CPP, the one key detail of a plan almost free of details raises a number of complications.

And that key detail is that under the Conservative plan, investing in the CPP would be voluntary.

The first question is whether voluntarily investing additional funds in CPP is something you should do. That 19 per cent is certainly hypnotizing. But as with any startling one-time investment return, a detailed look reveals some very special circumstances.

Kudos to the professionals at the CPP Investment Board for investing the money offshore to diversify the risk instead of putting all our eggs in one Canadian basket.

But the earnings as a result of a plunging Canadian dollar, which added some 10 per cent to valuations when those foreign assets were recalculated in loonies, are not something that can be repeated annually.

The tax advantage

Not being in Canadian market funds dominated by plunging oil and commodities was also a great advantage, but once again not easily repeated. CPP's real long-run return, even averaging in this bumper year, is a far less stunning 6.2 per cent.

Good returns are important. But when it comes to deciding where to invest your precious savings, perhaps the biggest consideration is taxes, especially for those rich enough to decide to make additional voluntary contributions. And CPP benefits are taxable.

Although I am no financial adviser, paying taxes once on your money and then putting it in a Tax Free Savings Account and never paying taxes again on the profits seems an obviously better deal in the long run.

If that is the case, then those topping up the CPP under the Conservative plan would only be those who had already set aside the full $10,000 annual limit on TFSAs.

The second complication of a voluntary program is one that already concerns some critics of other CPP expansion plans. That is the mixing of new contributions with the decades-old nest egg set aside by Canadians who have paid into the plan over their working lives.

Those who add new voluntary contributions cannot expect to benefit to the same degree as those who contributed under the old rules. Anything else smacks of government interference in a system that has managed to avoid politics.

The grasshopper problem

But the worst part of the plan is that it does not solve the one single problem that could lead to a new crisis of poverty among the elderly. And that is that too many Canadians just don't save enough voluntarily.

The existing CPP's claim to fame in the world of pensions is that it is "actuarially sound." That means that unlike what we have seen in places as diverse as Greece, Detroit and most recently Chicago, the CPPIB has enough money saved and invested to keep on paying out for 75 years based on current expectations.

But there is a big however.

And that is that the amount we contribute off our cheque every month isn't really enough to keep us comfortable during our long retirement. In fact, in many places the entire month's CPP cheque would barely cover monthly rent.

That's super for people who have paid-off houses and other sources of income.

But of course people like that are among the ants of Aesop's Fable. The ants have been saving for the long winter ahead. They will not be part of the pension crisis, except insofar as they have to pay taxes to prevent the old and destitute grasshoppers from starving.

The problem lies around the fabled grasshoppers who live for the present and never get around to saving. They already have many voluntary ways to save. They just can't bring themselves to volunteer.  

And even if the latest voluntary plan makes it past the consultation phase, it will do nothing to change that.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis

Clarifications

  • A previous version of this story said the CPP was "fully funded," unintentionally using a technical term that means existing assets were enough to pay out all accrued benefits. According to the same technical terminology, the CPP is actually an "open group" plan and is "partially funded" - meaning a combination of invested assets and projected contributions are sufficient to meet its financial obligations over the long term, according to the Chief Actuary of Canada.
    Aug 27, 2015 1:15 PM ET

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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