Let’s take the CPP – and be creative
TheGlobeandMail.com – News/Opinions/Opinion
Published Wednesday, Dec. 22, 2010. Bob Baldwin
The outcome of this week’s Kananaskis meeting of finance ministers was not as clear as the Rocky Mountain air but more like a fog one might associate with the Prince Edward Island venue of the previous gathering. While a modest enhancement to Canada Pension Plan benefits is still on the table, it’s less clear now than in June what direction it will take.
There are two dimensions to the problem plaguing Canada’s retirement-income system: inadequate incomes of the future elderly relative to their working-life earnings, and inefficiency of the available means to save individually for retirement. Of the two, income inadequacy is the bigger issue, and research undertaken since the Whitehorse meeting of finance ministers in December of 2009 has improved our understanding of it. A study released last week found that more than 40 per cent of today’s 25- to 30-year-olds risk a significant reduction in their living standard after retirement.
That bigger issue must be addressed through initiatives that aren’t purely voluntary on the part of employers and individuals – that is, some form of compulsion or automatic participation must be involved. No experience in any OECD country suggests that we will significantly improve retirement savings or the coverage of employer pensions through voluntary means.
It’s not clear yet how compulsory the “framework for Pooled Registered Pension Plans” will be. Official statements and press accounts vary on this point. But it seems key details remain to be determined.
At this point, public statements by federal Finance Minister Jim Flaherty suggest that PRPP contributions won’t be designed to achieve a particular level of retirement benefit. It will be important to see whether individual participants in PRPPs can make preretirement withdrawals. Finally, weaknesses in managing investments by individual investors are well-documented, and the nature of the investment choices open to those enrolled in PRPPs remains to be seen. It also will be important to see what mechanisms are in place to ensure that the interests of the plan managers and plan participants are aligned.
Even if they were compulsory, it’s hard to imagine how the proposed PRPPs will achieve the administrative efficiencies of the CPP. It’s also unlikely that PRPPs can offer the degree of predictability of benefits provided by the CPP. The PRPP proposal looks more sensible as a supplement to a modest increase in CPP benefits rather than a substitute for it.
The huge advantage of using the CPP’s legal and organizational structure is that it can provide pension benefits to whatever portion of the employed and self-employed one wants to reach. Simply increasing the CPP benefit rate and/or ceiling is rather blunt, and less well-targeted than a CPP reform should be. In a study published by the Institute for Research on Public Policy last week, I suggested we should develop a second tier of the CPP that should apply to earnings over $25,000 and extend beyond the current ceiling of $47,300. Tier 2 should only be compulsory – or feature automatic participation with the right to opt out – for those employees not already belonging to a workplace pension plan that meets some minimum standards.
Virtually all proponents of pension reform want reforms to be fully funded. If ministers further delay pension reform, it will be increasingly difficult to meet retirement-income objectives in a timely way on a fully funded basis since phasing-in new benefits will take a very long time. Also, until the fate of the CPP is clearer, it will be hard to advise Canadians on whether participation in a PRPP makes sense.
Bob Baldwin, an Ottawa-based pension consultant, is the author of Pension Reform in Canada: A Guide to Fixing our Futures Again, published by the IRPP.
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