Bill Morneau’s clever Canada Pension Plan deal

Posted on June 22, 2016 in Social Security Policy Context – Opinion/Commentary – The federal finance minister and his colleagues have come up with something that makes sense.
June 22, 2016.   By THOMAS WALKOM, National Affairs Columnist

Finance Minister Bill Morneau’s Canada Pension Plan deal is a clever bit of work.

It mollifies recalcitrant provinces, such as Saskatchewan, by postponing the full cost of CPP improvements for almost a decade.

It appeals to business groups because it kills Ontario’s plan to go it alone on the pension front.

It wins kudos from labour because it substantively increases the payout to retirees.

On top of this, it makes sense.

First, let us remember what Monday’s CPP deal, signed onto by Morneau and the finance ministers of eight provinces, is not.

It is not something that will help the current elderly or those near retirement. By the time it is fully operational, in 2065, most baby-boomers will be dead.

Nor will it make up for the erosion of company-sponsored pension plans. Finance department officials calculate the maximum payout in 2065 will be $19,927.

That’s better than the current maximum of $13,110. But no one will be getting rich on the CPP.

The new scheme does, however, promise to make it somewhat easier for those currently in their 20s and 30s to eventually stop working when they get old.

As with all fully funded pension plans, it will do so by taking money from workers now in order to give it back to them (plus interest) later. Think of it as forced saving.

Right now, workers are required to pay 4.95 per cent of their earnings — up to a wage ceiling of $54,900 — into the CPP. Employers must match that amount.

When workers retire, they get a guaranteed payout equal, at most, to about one-quarter of the average wage. But the average wage isn’t very high. After a lifetime of work, the top CPP payout this year is a mere $13,110.

The scheme announced Monday would increase that payout in two ways. First it would boost, by one percentage point, the premiums workers and their bosses must pay into the basic plan.

This would allow the plan to pay out, at retirement, a pension equal to one-third of the average wage.

Second, it would raise, by 14 per cent, the wage ceiling used to calculate premiums and payouts. Finance officials say that by 2025, this new ceiling will be $82,700. But the premium charged on the extra earnings is expected to be slightly lower — 4 per cent rather than 4.95 per cent.

The arithmetic is tedious. But the bottom line is that once this scheme is fully operational some 50 years from now, retired workers will be getting better pensions.

Canadian Labour Congress head Hassan Yussuff calls it historic. He’s right.

That politicians were able to agree on sensible pension reform is, at one level, surprising. Certainly the rumblings prior to Monday’s meeting were not encouraging. Saskatchewan, British Columbia and Quebec were all said to be opposed to significant CPP reform, arguing their economies are too weak to sustain additional payroll taxes.

Nor were the cash-strapped Atlantic provinces anxious to increase premiums.

But three things were at work for the reformers. First, the decision to postpone significant premium increases for up to nine years mollified those worried about higher payroll taxes. For most provinces, the year 2025 is two elections away.

Second, Ontario’s threat to produce its own pension plan added extra pressure. The Canadian pension landscape is already complicated by the fact that Quebec runs an autonomous, and slightly different, public pension scheme.

Business opposes the further balkanization of pension plans and most provincial governments heed business.

I’m not sure whether Premier Kathleen Wynne’s decision to play pension poker will help her politically. Her decision Tuesday to rule the proposed Ontario Retirement Pension Plan no longer necessary eradicates what had been her most important campaign pledge in the last provincial election campaign.

But in terms of setting the stage for an improved nation-wide pension plan, her bluff was inspired.

Third, Morneau deserves credit. I wrote he had wimped out when he kicked the pension can down the road last winter. Clearly, I was wrong.

Pension reform doesn’t come easily in this country. This particular set of reforms won’t click in fully until the 100th anniversary of the birth of the CPP. But for those intending to be alive in 2065, this was a good week.

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