CPP is in need of a boost

NationalPost.com – FinancialPost.com
Saturday, Nov. 6, 2010.   Jonathan Chevreau, Financial Post

Are you ready for a “Big” Canada Pension Plan? Expanding or “supplementing” the CPP is the frontrunner among proposals for pension reform but provincial acceptance may be a stumbling block.

Various public-sector unions are pushing to expand CPP, as is CARP’s proposal for a Universal Pension Plan that would appeal to its 45-plus demographic now in spitting distance of retirement.

CPP reform requires two-thirds of provinces to approve it and some, notably Alberta, prefer a private-sector solution. When finance ministers met in June, federal Finance Minister Jim Flaherty indicated “modest” enhancements to CPP benefits were on the table. Ontario Finance Minister Dwight Duncan told CARP’s annual meeting last week it’s important to improve CPP because it will eventually save governments money paying out Old Age Security and the Guaranteed Income Supplement.

Last month, Ontario issued a consultation paper suggesting a “modest expansion” of CPP benefits and called for more pension innovation for the self-employed and small business. In October, Simon Fraser public policy professor Jonathan Kesselman assessed the major “Big CPP” proposals, concluding a mandatory public scheme with defined benefits ranks highly on all criteria except individual flexibility.

He says workers with low lifetime earnings are adequately served by the status quo but a “deficiency” exists for a broad range of middle and upper-middle earners. Only a “Big CPP” provides the necessary universal coverage, mandatory savings, low costs and defined benefits indexed to inflation. The alternative of mandating employers to offer adequate pensions would be “without all the same advantages.”

Mercer partner and actuary Malcolm Hamilton favours a “modest” CPP expansion, since it would be fully funded and — unlike the original CPP unveiled in 1966 — “intergenerationally responsible.” But there are unanswered questions, like tax treatment of employee contributions. Hopefully, he says, RRSP and pension limits will not be reduced if CPP is expanded.

Ontario’s paper notes most current retirees do not receive the maximum CPP benefit of $934.17 a month (in 2010). The average is 56% of that. Experts say those needing the most help are middle-income workers without employer pensions who earn between $47,000 and $94,000. A simple way to help them is to raise the threshold on worker earnings on which CPP premiums are calculated. Consultant Keith Ambachtsheer says the “weight of opinion” currently favours such a tweak.

The case for doubling this earnings ceiling was made earlier this year in a paper by Morneau Sobeco chief actuary Fred Vettese. Currently, the so-called YMPE or Year’s Maximum Pension Earnings is $47,200, which rises to $48,300 next year. (Employees and employers each pay 4.95% of the YMPE into CPP.)

The alternative is to leave the earnings base untouched and raise contribution and benefit rates so the amount of “income replacement” moves from the current 25% of career average annual pensionable earnings to perhaps double that. Kesselman agrees the YMPE needs to raised “substantially, by at least 50%.” But he also says the percentage of a worker’s average insured pensionable earnings needs to be increased from 25% to 40% or 50%.

Susan Eng, CARP’s director of advocacy, believes both measures can be implemented. “With just one or the other, you can’t do enough.”

Vettese notes the earnings base for America’s Social Security is US$106,800, one reason American benefits are more generous than ours. But to be fair to all generations, he would implement a higher YMPE gradually, with no retroactivity, so extra CPP benefits kick in slowly over 40 years. So as Hamilton notes, improved CPP benefits will be “of little use to those now nearing retirement.”

Even this simple fix entails “considerable” implementation challenges, Ambachtsheer says. Also, he warns, many may be disappointed when they realize that whatever is done, “it will only have major impact decades from now.”

Among the skeptics is consultant Greg Hurst, who identifies six “myths” propagated by Big CPP proponents. One is that CPP operates as a standalone program. Many employer pensions are integrated with CPP so any expansion of contributions and benefits will impact the rest of the system. Another myth is that CPP is inexpensive to administer.

Perhaps most serious is the notion that CPP is self-funded and imposes no tax burden. Public-sector employers pushing for a big CPP are funded by taxpayers, Hurst says, as are CPP contributions made by those employers. Ottawa treats CPP contributions as tax deductible so they constitute a “tax expenditure,” like employer pension contributions and RRSP contributions.

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– For Malcolm Hamilton’s complete analysis of Big CPP, see Jon’s blog at www.financialpost.com/wealthyboomer

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