Nov. 24, 2018
The first major expansion of the Canada Pension Plan in over a half century is looming and there is already a whiff of scandal in the air. Public sector pension plan sponsors should be scrambling to trim benefits in their own plans to keep contributions and pensions at a reasonable level, but instead a conspiracy of silence prevails.
To understand what is going on, we need to go back to 2015. At that time, the government of Kathleen Wynne in Ontario was pushing hard for a new universal pension plan – the Ontario Retirement Pension Plan (ORPP). The purpose of the ORPP was to fill a perceived shortfall in retirement income for the two-thirds of workers in the province who were not covered by a workplace pension plan. A slight majority of the other third are government workers. The latter group would have been exempted from participating in the ORPP since they already had rather generous pension coverage in the workplace.
The 2015 federal election changed everything as the newly elected Liberals agreed to work with Ontario and the other provinces to expand the CPP instead. Minister of Finance Bill Morneau reached an agreement with most of the country’s provincial finance ministers on the expanded CPP in June, 2016 (Manitoba and Quebec fell in line later). As a result, Ontario abandoned its ORPP.
The CPP expansion, however, was fundamentally different from the proposed ORPP. No one would be exempted from participating, which meant that employers would have to change their workplace pension plans to prevent total pension benefits from becoming excessive. This was primarily a public sector problem since the pensions in private sector plans were generally more modest. And besides, a number of private sector sponsors have indicated their intentions to pare back the benefits in their plans to recognize the bigger CPP pension.
Most public sector plans, including the monolithic federal Public Service Pension Plan, are geared to providing a pension of about 70 per cent (actually a little more) of final average income to employees with 35 years or more of service. The 70-per-cent income target might seem reasonable until you consider three factors. First, for a reason I cannot fathom, it doesn’t include the Old Age Security (OAS) pension. As far as I know, the government is not paying out OAS with Monopoly money. Second, pensions at this stratospheric level are possible only if the amounts contributed are higher than what individuals who save on their own can contribute to registered retirement savings plans (RRSPs). The government simply doesn’t allow people to make enough tax-deductible contributions to save enough to generate a 70-per-cent pension. Third, most workers can maintain the same standard of living after retirement with less than 70 per cent – often much less.
It is the third point that is the most contentious, even though the fallacy of the 70-per-cent target is easy to demonstrate. A 2017 study by Bonnie-Jeanne MacDonald and Lars Osberg of Dalhousie University and Kevin Moore of Statistics Canada found that more than 80 per cent of workers who retired with a gross replacement rate of 65 per cent to 70 per cent were able to improve their standard of living after retirement, and in many cases the improvement was dramatic. The example in the first table shows how a middle-income couple’s standard of living could improve by a whopping 71 per cent. (Note the example assumes that mortgage payments and child-raising costs would end by retirement.)