It turns out shockingly few workers will benefit from the steeper CPP we’re all forced to pay

Posted on September 23, 2016 in Social Security Policy Context – FP/FP Comment
September 22, 2016.   Kevin Libin

Perhaps someday our grandchildren will learn the stories of the political heroes that vanquished the Great Canadian Pension Crisis.

They won’t be very interesting stories. But the politicians playing hero would have us believe that the enhanced Canada Pension Plan, which the Trudeau government unveiled in detail this week, was truly historic. Ontario Premier Kathleen Wynne has already decided it will be a legacy of hers, perhaps for lack of other options.

Wynne had declared retirement security “a national crisis” that absolutely “needed to be tackled.” And it was her threat to launch an Ontario pension plan so economically reckless that the federal Liberals were forced to come up with an alternative to appease her, dragging the other provinces along into an enhanced CPP, something Wynne has been giving herself plenty of credit for. She would not stand for anything less than significant change, demanding “an enhancement that’s going to solve challenges of people in a real way.”

So what if a new report by Morneau Shepell, the human resources firm once chaired by our current federal finance minister, finds that the new enhanced CPP doesn’t significantly tackle all that much — and, in some ways, makes our retirement system even worse. Finance Minister Bill Morneau had come to champion the enhanced CPP, too, as one that would make a “real difference in future Canadians’ situations.” But few Canadians will see more secure retirements, as calculated by Morneau Shepell’s chief actuary Fred Vettese and co-author Bonnie-Jeanne MacDonald. Wynne’s own finance minister, Charles Sousa, praised the federal Liberals for delivering pension reform that showed “great leadership and great desire to do something of great benefit for our young people.”

That’s a lot of “greats,” and all of them seemingly undeserved, given that the number of middle-income workers who will no longer have “inadequate” savings after this landmark CPP change, according to Vettese and MacDonald, amounts to a modest 8.7 per cent: Previously 36.4 per cent, we will now have 27.7 per cent of middle-class Canadians inadequately prepared. But that 8.7 per cent, notice, falls within a specific “middle-income” subcategory, which itself comprises only 60 per cent of Canadians. So, in total, we have five per cent of all Canadians who might see a more secure retirement from an enhanced CPP, even though the other 95 per cent of us will have no choice but to participate.

Just 2.3% of the population gets the right retirement security from the new CPP

That’s not to say the government should necessarily have done more. The existence of the Pension Crisis in the first place, while rumoured, was never actually proven. Low-income people were already doing as well or better in retirement than they had while working, thanks to sufficiently generous old-age income supports. Nor was there reason to fret much over the large number of Canadians with workplace pension plans who would be adequately covered. High-income earners would, naturally, be fine, too.

The whole “crisis” really centred around a subgroup of a subgroup: those middle-class Canadians without workplace pensions who were supposedly failing to save enough in RRSPs and other vehicles to keep their existing lifestyle after retirement. And even then, we could never be sure how a serious a problem that was given that they might also have uncounted savings stowed elsewhere, in non-registered investments or home equity, or perhaps didn’t plan to retire at 65, or 75, or ever. Even Bill Morneau, before he was a politician and still worked at the human resources firm that bears his family’s name, co-authored a book with Vettese that repudiated ““fear-mongering media stories” and “overblown” worries that Canadians were under-saving.

Now, he’ll force Canadians to save more for their retirement whether they want to or not, or whether they need to or not. Eventual changes to benefits from 25 per cent of covered earnings to a third, and a heightened ceiling on covered earnings from what would have been $72,500 in 2025 to $82,700, will result in some Canadian workers paying as much as 40 per cent more in CPP contributions by that date — up to an additional $2,200 a year deducted from their take-home pay, according to Finance Canada’s backgrounder. But many of them won’t ever need it. Before the CPP enhancements, 11.4 per cent of middle-class Canadians were over-prepared for retirement. Now, more than 16 per cent will be over-prepared, forced to sacrifice their working lifestyles to save money they will likely never require and might never get to spend.

And because even more workers will now be made to over-save for retirement, the number of workers with “appropriate” savings looks even more paltry than that 8.7 per cent figure would suggest. With more Canadians moving up from the “appropriate” category to the “excessive” category, the net growth in “appropriate” savers is a mere 3.9 per cent, Vettese and MacDonald find — that’s a scant 2.3 per cent of the total population set to get from the enhanced CPP neither too much nor too little retirement security. Just as concerning is the possibility that useful workers will now face the incentive to drop out of the labour force early, which, given our lagging productivity and shrinking ratios of workers to retirees, would be a regrettable policy outcome.

That said, there is some history made here. Vettese and MacDonald acknowledge that after such commotion over pensions in recent years, with so much political capital spent, governments won’t readily touch the issue again for a long time. The enhanced CPP, in other words, marks the official end of the Great Canadian Pension Crisis. May it be remembered for its pointlessness.

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