CPP reform essential in light of sagging savings
Stalled process revived at end of 2012, but ministers still divided on how to prop up pension
The stalled engine of pension reform sputtered back to life late last year with surprising word that federal Finance Minister Jim Flaherty and his provincial counterparts are considering making changes to the Canada Pension Plan and will bring specific proposals to the table when they meet again this June.
Maximum monthly CPP benefit rates for 2013
- Retirement pension: $1,012.50
- *Post-retirement benefit: $25.31
- Disability pension: $1,212.90
- Survivor's pension (under age 65): $556.64
- Survivor's pension (65+): $607.50
- Disabled or deceased contributor's child benefit: $228.66
- Death benefit (one-time payment): $2,500.00
*2013 is the first year that this new benefit will be paid out. See sidebar below for details.
Annual contribution rates for 2013:
- Maximum pensionable earnings: $51,100
- Basic exemption amount: $3,500
- Maximum employee/employer contribution: $2,356.20 each
Source: Service Canada
Thanks in part to an about-face by Quebec — where the new, left-leaning Parti Québécois government is more open to the idea — the ministers emerged from a meeting in December 2012 with an agreement to work toward a "modest increase" of CPP benefits, to be enacted once the economy improves beyond certain yet to be determined "trigger" points.
"There's no consensus on CPP expansion at this time," Flaherty said at the time. "[But] the ministers did agree that we would task our officials with working on definitions of 'modest increase' and 'economic triggers' that we would then discuss at our next meeting in June."
Making any changes to the national pension plan requires the approval of two-thirds of the provinces representing two-thirds of the population. An earlier reform effort led by Flaherty in 2010 died after failing to win the support of Alberta and Quebec, which was led by a Liberal government at the time.
Not saving enough
CPP's investments are handled on behalf of the government by the Canada Pension Plan Investment Board while Quebec's separate QPP is managed by Caisse de dépôt et placement du Québec. CPP investments have been doing very well, and so far, the government has not had to dip into them to pay out pension benefits, but many observers say that won't be enough to meet the future demands of Canada's aging population.
Financial analysts and politicians have been warning for some time that we are not saving enough for retirement, as company-led registered pension plans have become scarce and other investment options have either dried up or gone unused.
The government began phasing in a series of changes to the Canada Pension Plan in 2011, including higher penalties for taking an early pension and bigger benefits for waiting until after 65 to collect. In 2013, the phasing in of those changes continues. This year, your CPP payout will be reduced by 0.54 per cent for each month before 65 that you receive it, compared to 0.52 per cent in 2012. For each month after age 65 that you wait to collect, your benefit will increase by 0.70 per cent, for a maximum increase of 42 per cent for those who start receiving a pension at age 70 (in 2012, the increases were 0.64 per cent and 38.4 per cent, respectively).
2013 is the first year that the post-retirement benefit will be paid out. As of 2012, those who start receiving CPP or Quebec Pension Plan benefits before age 65 and continue working (outside Quebec) must contribute to the pension plan. Their contribution is paid out in the following year in the form of the post-retirement benefit, which is a fully indexed lifetime benefit separate from the regular CPP and QPP benefit. For those between 65 and 70, the contribution is voluntary.
Post-retirement benefit contribution rates:
- Employee's contribution: 4.95% of pensionable earnings
- Employer's contribution: 4.95% of employee's pensionable earnings
- Self-employed workers contribution: 9.9% of pensionable earnings
Only 24 per cent of eligible tax filers contributed to an RRSP in 2011, depositing a total of $34.4 billion, less than five per cent of what they were allowed to contribute, according to Statistics Canada. In 2011, just over six million Canadians belonged to a registered pension plan (RPP).
Household personal savings have been falling — from a high of 20.2 per cent in the early 1980s to a low of 2.1 per cent in 2005, according to Statistics Canada.
Savings have rebounded slightly since then — the savings rate was 3.9 per cent in the third quarter of 2012 — but are still, on average, "woefully inadequate" to finance a comfortable retirement, according to a recent report from the Bank of Montreal.
"Returns over the next 10 years are going to be extremely low because volatility in the equity markets is extremely high," said Leo Kolivakis, a former analyst with the Caisse and the Public Sector Pension Investment Board who now publishes the blog Pension Pulse.
"How are people supposed to make and save money in this environment?"
Pooled pension plans haven't taken off
CPP is currently doing very well. Its portfolio has grown rapidly to some $170 billion, yet it makes its payments to retirees on the strength of garden-variety payroll contributions. That is expected to change by 2021, however, when the fund will have to start drawing on its investment income in order to make ends meet.
When Ottawa was blocked on CPP reform, it instead introduced pooled registered pension plans (PRPPs), a compromise aimed at the self-employed and those at smaller workplaces where no RPP is in place.
Like CPP and QPP, the voluntary PRPPs are supported by payroll contributions, though companies themselves are not required to chip in. The contributions are pooled, reducing administrative costs, but payouts are more susceptible to changes in the market and are not indexed for inflation.
Critics, including the Canadian Labour Congress, say PRPPs do little except reward banks and insurance companies with fees.
The Quebec Liberals moved quickly to approve such plans, known there as voluntary retirement savings plans, though the effort was derailed by the change in government. The Parti Québécois is reportedly planning to revisit the idea, perhaps as early as this spring.
Pooled plans are under consideration by other provinces as well, though Ontario's finance minister, Dwight Duncan, has said he will block PRPPs unless changes are also made to the CPP.
NDP, Labour Congress call for doubling of benefits
But although many politicians and advocacy groups agree changes to the pension system need to be made, there is little agreement on what a reformed CPP should look like.
The New Democrats and the Canadian Labour Congress, for example, have proposed a doubling of the current CPP monthly benefit, phased in over a seven-year period, an increase they say could be covered through relatively modest premium hikes amounting to a contributions increase of 0.43 per cent of pensionable earnings per year for workers and employers.
Their plan would see the CPP cover up to 50 per cent of pensionable earnings, from the current 25 per cent.
Critics say boosting contributions would put too much strain on the still-fragile economy, but Kolivakis says "now is the time" to reform the CPP.
"The reality is it will improve productivity of workers, because they know they'll have safe retirements," he said. "And it will mean lower social welfare costs down the road.
"The best thing to do is expand CPP. It's portable, you can take it with you wherever you work … and the money is being managed by professionals."
With files from The Canadian Press