Ontario’s really bad pension scheme

Posted on February 13, 2015 in Social Security Debates

NationalPost.com – FP/FPComment
February 12, 2015.   Jack M. Mintz

The province of Ontario is soliciting comments on its proposed Ontario Retirement Pension Plan (ORPP). A government consultation document raises several issues about the proposal, but none got to the key one: is this pension plan needed at all?

The proposal is for Ontarians to ‎pay a payroll tax of 3.8% of earnings up to $90,000, half shared by the employer. The plan will provide 15% of earnings after retirement. For example, at $20,000 in income, payroll taxes annually would total $627 with a pension payment of $2,848 (or $238 per month) after 65 years of age. The ORPP payment will affect income taxes and income-tested benefits.

Under the proposal, an employee enrolled in a “comparable” defined benefit or target plan will not need to join the ORPP. Self-employed individuals will not be able to join the plan due to income tax act limitations.

The key issue is whether Ontarians are not saving enough. Ontario politicians maybe believe there’s a problem, but what is the evidence?

The best research has been done by Statistics Canada and McKinsey with large surveys coming to similar conclusions. While it is agreed that some Canadians have insufficient replacement income at retirement, it’s widely agreed that three-quarters to four-fifths of Canadians do well, even projected into the future.‎ This suggests a scalpel is needed, not an ORPP sledgehammer.

Canadians have been saving well over the years and there is little to presume that this behaviour has changed. Sure, interest yields are recently low but stock markets have come back since 2009. Low yields affect any saving plans including a government pension plan, which could run large unfunded liabilities. There are no magic bullets.

Ontario’s proposed mandatory pension scheme could do more harm than good

Based on data, not conjecture, a young Canadian buys a home with a mortgage and pays off most debt by retirement. Housing equity is a significant asset of which its after-tax value is more than the combined value of Canada Pension Plan, Quebec Pension Plan, tax-assisted registered pension and retirement assets. Taking into account other financial and business assets held by Canadians, most Canadians do not need new mandatory saving plans. Some individuals require support but this has been provided by a combination of OAS, CPP/QPP, Guaranteed Income Supplement, provincial support programs‎, Medicare and low income taxes on seniors. It is far from clear an expansion of CPP, QPP or the ORPP is at all needed for the broad population.

In fact, a mandatory Ontario‎ pension plan could do more harm than good.

First, once taking into account personal taxation and income-tested programs, the Ontario plan will discriminate against low income seniors and some others in middle class ranges.

Low income seniors will be taxed on Ontario pension income as well as lose GIS payments, 50 cents on each dollar. For a senior with $20,000 in income, barely above the measured poverty line, the Ontario pension plan will be reduced from $2,848 to $1,424 with the loss in GIS and a further $584 by federal and provincial tax payments, leaving only $740 to cover rent and food. While working, the person would pay the same payroll tax rate as others but would end up with a pretty lousy after-tax return on the asset.

Seniors with more than $71,592 ‎will also be hurt with the clawback of federal OAS payments at 15 cents on each dollar of Ontario pension payment. Taking into account both this clawback and federal and Ontario income taxes, the Ontario pension payment is reduced by up to 55%!

Second, any mandatory scheme has bad consequences for those who do not need it. Young families trying to save for home equity will need to pay into a plan that is a less important retirement asset at their stage of life.‎ Others who invest in businesses and other financial opportunities will have to face new taxes. Employers looking to hire more workers will now pay a new tax even if they provide some alternative retirement benefit that is “not comparable” to the Ontario plan such as a defined contribution plan.

Third, the Ontario plan will be expensive to operate, the reason Alberta decided not to run its own pension plan a decade and a half ago. Ontario will need to track migrants in and out of the province. It will also need to administer the plan on its own. ‎It will also lead to large unfunded liabilities, adding on to provincial debt, if payroll taxes do not cover benefits.

Fourth, by exempting those employers with comparable plans — defined benefit and target plans — labour markets will be distorted in favour of unionized employers where such plans are typically found. Also, capital markets will be distorted in favour of financial firms that can provide comparable plans.

Finally, the Ontario government will have an enticing asset to use for industrial policy. Although the budget proposal makes clear that the Ontario pension plan will operate on market-based principles, we already see ruminations to use funds to finance Ontario infrastructure. Pension funds have an interest to fund long-lived assets, anywhere in the world, but pressure from the Ontario politicians could undermine prudent investor behaviour.

Governments do have a role in supporting our seniors. Poverty among single seniors is extraordinarily high at 20%. Long-term care will be a serious issue in the future for many seniors living longer periods with ill health.

The ORPP is an expensive and poorly targeted approach to support seniors. The Government should focus with more precision to help the most vulnerable.

Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary.

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