Canadians should call this pension plan scheme what it is — a shell game, not a savings plan

Posted on in Social Security Debates

NationalPost.com – Full Comment
February 17, 2016.   Tasha Kheiriddin

How much money do Canadians need for retirement? According to a new study by the Broadbent Institute, they need more than they have now.

“We’re looking at a situation in our country — 10 years down the line, 15 years down the line — where millions of Canadians have very little disposable income and that’s not good for the economy,” warned Rick Smith, Broadbent’s executive director. According to the study’s author, Richard Shillington, “These findings raise serious questions about the policy needs for future pensionless cohorts, such as the adequacy of benefits from Old Age Security, the Guaranteed Income Supplement and the Quebec and Canada pension plans.”

At the same time, the Ontario government announced that it is delaying the introduction of its much-touted Ontario Registered Pension Plan (ORPP) by a year, until 2018. Ottawa is also hopping into the mix, pledging to collect ORPP premiums through its existing Canada Pension Plan (CPP) framework, to reduce costs and duplication. In return, Ontario will encourage other provinces to come on board with a nation-wide expansion of the CPP, buying the political goodwill of millions of seniors — and seniors-to-be.

After falling under the radar in the federal election, retirement income is suddenly a hot issue. But it’s not the old who are the main focus, it’s the nearly old. First favoured with tax breaks and bigger child benefit cheques in the last campaign, the middle-aged middle class are now being courted with dreams of a champagne retirement. They are “under-saving” — that sounds so much nicer than “over-spending” — and thus face a drop in their standard of living at retirement, which presumably only the government — a.k.a., their tax dollars — can fill.

That is, unless they inherit nothing from their parents. In 2006, a study by Decima Research found that Canada’s baby boom generation stood to inherit $1 trillion — the largest such transfer in history. Fifty-four per cent expected an inheritance, with an average value of $283,000, half in cash and the rest in real estate and other valuables. While a portion of this may have been lost due in the 2008 financial crisis, many investors have had time to make gains, particularly in the housing market, which continues to rise unabated in major markets such as Toronto and Vancouver. And, in turn, a portion of that inheritance is likely to make its way into the hands of the boomers’ children: today’s future retirees.

Yet nowhere in the Broadbent report, or calculations of the ORPP, does future, intergenerational wealth transfers figure into retirement savings predictions. Maybe this is a good thing, as the Wynne government in Ontario would probably start salivating at the prospect of an inheritance tax. But it is an important omission, because it skews the “needs” of retirees, which are far from uniform. Ignoring this factor benefits wealthier seniors, or near-seniors, because they would also reap any across-the-board increase in CPP benefits, despite the fact that they do not require them for an adequate retirement.

Expanding the CPP and creating the ORPP will actually only worsen the “under-savings” problem for the bulk of the middle class
And neither do most retirees. Contrary to the Broadbent report, a McKinsey study published in February 2015 found that “83% of the nation’s households are on track to maintain their standard of living in retirement.” That figure rose to 93 per cent for “modest-income” Canadians. In fact, those most likely to see their standard of living decline were not low-income Canadians, but mid- to high-income households that did not put aside enough money to maintain their wealthier lifestyles. This does not mean, however, that they fall into poverty and need help from taxpayers in their old age. It means that they will live more modestly than they did during their working years — a choice they made by not saving more when they had the chance to do so.

Similarly, expanding the CPP and creating the ORPP will actually only worsen the “under-savings” problem for the bulk of the middle class. Unless Ottawa intends to add to its sea of red ink, the burden of paying for future income security will fall on today’s middle-aged workers, at precisely the time they need their income for expenses such as children, mortgages and, yes, savings. Increasing mandatory CPP contributions and imposing ORPP contributions will decrease their ability to fund all of these costs. Unless they adjust their lifestyle in consequence, this will increase the middle class’ debt load, which will cost them interest — costs that may wipe out any “gains” they make when they hit retirement age, 10 or 20 years down the road.

Instead of burdening workers with more taxes — which will conveniently fund pools of capital for Liberal infrastructure projects, as Ontario Finance Minister Charles Sousa let slip when the ORPP was introduced — governments at all levels should reduce Canadians’ tax burden and allow them more room to meet their expenses, including saving for retirement. While the Liberals have lowered taxes for the middle class, any increase to CPP contributions would effectively wipe these gains out. Canadians should call out this scheme for what it is — a shell game, not a savings plan.

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