Ottawa and Ontario call for higher CPP benefits

Posted on June 11, 2010 in Social Security Debates

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TheStar.com – Business – Federal and provincial finance ministers to meet Monday on issue
Published On Thu Jun 10 2010.  James Daw Business Columnist, Les Whittington Ottawa Bureau

The federal government and Canada’s largest province are calling for changes to the national pension plan to address what some call a crisis in the country’s retirement income system.

In advance of what could be a historic meeting next Monday in Prince Edward Island of federal and provincial finance ministers, Ottawa and Ontario signaled Thursday they will attempt to persuade their colleagues to adopt significant changes to the Canada Pension Plan.

“I believe that we should consider a modest, phased-in and fully funded enhancement to defined benefits under the Canada Pension Plan in order to increase savings adequacy in the future,” federal Finance Minister James Flaherty says in a letter to Ontario’s Finance Minister Dwight Duncan Thursday.

The Flaherty letter was released late in the day after Duncan made public a letter he had earlier sent to his provincial and federal counterparts calling for similar enhancements to the CPP.

The actions represent the most important development in more than a year of discussions and high-level study of pensions.

The search for solutions was touched off by widespread recognition that nearly a third of all Canadian families lack any pension savings, but until now, it appeared that Ottawa and the provinces were content to put the issue on the back burner until the economy recovered fully.

Flaherty had previously taken a hands-off approach to the CPP.

Ontario is calling for an increase in Canada Pension Benefits, plus new private-sector pension options, to deal with a looming shortfall in retirement income.

“We believe there is an opportunity to improve Canada Pension, modestly, working together,” Dunc an said in a telephone interview. “We have not landed on price numbers at this point, but we think that is the natural vehicle for delivering enhanced public pension.”

Any change to the CPP and the Quebec Pension Plan would require support of a two-thirds of the provinces and two-thirds of the population.

Duncan said it would be better to raise CPP contributions and benefits gradually than start one or more supplementary pension plans, as a panel of experts proposed earlier to British Columbia and Alberta.

The Canadian Labour Congress, representing unions with about 3 million members, has been calling for a doubling of CPP benefits for nearly three decades.

But the Canadian Federation of Independent Business said Thursday that 71 per cent of its members are opposed to the CLC proposal, predicting it would be “a major job killer.”

“Economists worldwide recognize that payroll taxes are a drag on job growth and economic development,” said CFIB president Catherine Swift.

The average CPP benefit is now only about $6,000, and the maximum only about $11,000, to be adjusted each year in line with rising prices. Employers and employees contribute a total of 9.9 per cent of pay, on earnings between $3,500 and $47,200 a year.

Duncan said the CLC is looking for too much to double benefits, but Ontario would support modest increases in benefits and contributions, phased in gradually.

“There is a clear advantage of a pan-Canadian response,” he said in an interview. “The system works well. It has served us well. All of the framework is in place. It is extremely well managed.”

Any increase in benefits would be paid from contributions and investment returns over a person’s working career, unlike the existing CPP that now pays benefits from contributions made the same year. The existing reserve fund managed by the Canada Pension Plan Investment Board will be used to defray a portion of costs as the baby boom retires.

Duncan said Ontario also favours giving new options for companies and individuals to join large-scale private pension plans that would provide a more cost-efficient way to save more for retirement than individual savings plans.

He did not signal Ontario’s views on how to secure benefits of existing company pension plans, such as with an insurance plan or preferred standing in a bankruptcy.

The province is still calculating the cost and potential consequences of raising employer contributions to put its Pension Benefits Guarantee Fund on a sound footing.

Flaherty also said he favours doing more to encourage retirement savings by individuals, including changing current rules to help self-employed Canadians put aside more money for retirement. He said he would also like to see innovations to allow banks and insurance companies to off better pension arrangements for employers and employees.

But even if these changes are brought in, Flaherty says he is “concerned that some Canadians may not save enough for their retirement.” That’s why he would like to see an expansion of the CPP, Flaherty wrote to Duncan.

Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, said in an earlier interview it would be a major step forward for finance ministers to agree something needs to be done for young workers without a pension plan.

A report commissioned by the federal government concluded Canadians are not headed for a major income shortfall in retirement, but critics have argued the report used unrealistic assumptions and did not deal with the impact of current economic trends and the decline in pension plan membership.

Economists at TD Bank Financial Group warned Thursday that more middle-income workers will see their living standards drop in retirement as time goes by.

They predict workers born in the 1980s will have more difficulty getting a pension plan than those born in the 1940s due to a combination of factors.

Economic growth is likely to be slower, interest rates lower, while annual increases in the value of homes and stock prices could be modest.

Meanwhile, the young generation is graduating with more student debt, saving less than their parents and grandparents, taking on more debt. Fewer will have a company pension plan.

So the economists estimate 25 per cent of the middle band of wage earners born in the 1980s will see their standard of living decline if they have no pension plan, compared with 15 per cent for those born in 1940s.

A much higher percentage of the upper 40 per cent of income earners will see a decline of living standards, and a much lower percentage of the bottom 40 per cent of income earners thanks to government pensions.

The economists defined a decline in income standards as having less than 70 per cent of pre-retirement earnings, the level of income a good pension plans aim to provide after 35 years of service. They made their estimates using a Statistics Canada computer model and database called LifePaths.

< http://www.thestar.com/business/article/822075–ottawa-and-ontario-call-for-higher-cpp-benefits >

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