Pensions for the poor, or why governments should focus reform efforts on those who have the least
NationalPost.com – FP/Comment
16/10/13. Jack M. Mintz
Little progress has taken place. Hence, Ontario’s gambit
Ontario plans to introduce its own supplementary pension plan if the federal and provincial governments do not enhance the CPP. Will the threat work or will Ontario retreat once Ontarians understand the implications? After all, forced saving would hamper young Ontarians in funding a home. Businesses would face higher payroll taxes, putting them at a disadvantage relative to other provinces. Taxpayers would have to cover fund deficits.
Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.
I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.
Pension reform is difficult. Governments have been considering various pension reforms since December 2009 when federal, provincial and territorial ministers of finance concluded that the pension system was not in crisis since roughly four-fifths of Canadians have been saving enough pension, RRSP, home equity and other assets to achieve adequate retirement income.
Instead, reforms were to focus on Canadians with modest middle incomes and insufficient income at retirement. Old Age Security (OAS), the Guaranteed Income Supplement and the Canada Pension Plan (CPP) have protected 94% of low-income elderly Canadians from poverty.
This rationale for pension reform to help modest middle-income Canadians remains a focus for several recently suggested reforms. Yet, little has happened – perhaps it is time to change the music.
Since 2009, the federal government and several provinces have introduced legislation for Pooled Registered Pension Plans to assist small and medium size businesses offering low-cost defined contribution plans to employees. Some regulatory reforms have been introduced to help businesses finance deficits of defined benefit plans. Some new innovations, such as shared-risk pensions (defined benefit plans whereby benefits are adjusted depending on the plan’s performance), have also been pursued for public sector plans, the latest proposal in Alberta. The age of eligibility to receive OAS has been increased from 65 to 67.
The ministers also considered a modest expansion of the CPP to help the minority of modest-income Canadians obtain a larger secure benefit after retirement. After four years, little progress has taken place. Hence, Ontario’s gambit.
The 2008-9 global financial crisis has resulted in several stresses that did not exist in the previous two decades. Low financial returns in the past five years have made difficult accumulating retirement wealth. Many defined benefit plans have become insolvent, requiring cash-constrained employers to fund deficits. Slow global economic growth has discouraged Canadian governments from increasing payroll taxes to fund any enhancement of the CPP in fear of hurting employment. Governments are in deficit.
However, not all is bleak. Today, Canadian net household worth to disposable income is almost back to the 2007 peak. Canadian household debt has risen but still remains below 20% of assets, given the Canadian culture to pay down mortgages before retirement. Personal saving ratios – adjusted for consumer durables, inflation and mark-to-market valuation – had dipped sharply in 2008 but improved as stock markets returned toward peak levels. The federal government and some provinces are getting closer to balancing their books.
We really don’t know how well Canadians are doing today to achieve retirement income goals but most would suspect that it is now a more challenging climate given expected low growth and interest rates. Two provinces are suggesting some unique proposals in part to ensure that modest income Canadians are protected.
The Quebec government’s D’Amours Committee recommends a mandatory longevity pension plan paying benefits beginning at age 75 to supplement the Quebec Pension Plan. Benefits under the longevity plan would increase over time, matching contributions that would be 3.3% of earnings up to a maximum.
Yet, this intriguing proposal has raised various concerns, some common to other proposals for CPP expansion. People will find they will have higher incomes after 75 years of age than they would in earlier years of retirement. Also, employees who believe they are unlikely to live much past 75 may not wish to contribute to a defined benefit plan. Younger workers face the risk of funding shortfalls in later years. With a soft economy, employment costs are increased with higher payroll taxes paid by employers.
PEI has offered a different proposal for CPP reform: The replacement rate would be increased for those earning between $25,000 and the existing $51,000 maximum. Effectively, this would provide up to a modest $3,900 annually to each retiree (compared to about $12,100 maximum in CPP payments). The question is whether this modest approach, seemingly endorsed by Ontario, is worth the effort.
The PEI solution has its own complexity while raising questions of fairness. Those with volatile incomes could have lower pension benefits than those with more stable income. Such income fluctuations make it more difficult to assess contribution rates to ensure full funding of the CPP. In this sense, it is simpler to increase the replacement rate for all eligible income.
Yet, in the end, what are we trying to accomplish? Certainly, the D’Amours report focus on risk-sharing and inter-generational equity is on the mark but how much should the state ensure a minimum retirement income? Today, modest and middle income retirees receive up to roughly $18,500 in CPP benefits and OAS ($37,000 as a couple). Private saving and housing equity provide additional retirement support.
While most low-income Canadian retirees are protected from poverty, recent OECD data shows that over 16% of single elders have retirement income below the poverty line. This is serious.
When a spouse passes away, certain benefits are lost that the couple received previously (at least 40% of CPP payments and a OAS payment). While Guaranteed Income Supplements and some other benefits might soften the blow, a survivor has less income to meet fixed expenditures such as rent. One could provide more security to families by providing an option allowing surviving spouses a full CPP pension (a higher contribution rate would therefore be assessed for those increasing survivor benefits).
Income security is a noble aim but a focus on elder poverty might have more resonance.
Jack M. Mintz is Palmer Chair, School of Public Policy, University of Calgary.
< http://opinion.financialpost.com/2013/10/16/jack-mintz-pensions-for-the-poor-or-why-governments-should-focus-reform-effort-on-those-who-have-the-least/ >