TORONTO - The C.D. Howe Institute is calling for significant changes to Ottawa's proposed new pension system, dismissing it as a re-release of the existing RRSP shelter "with a new coat of paint."
In fact, a new study by the Toronto think-tank released Thursday says that Pooled Registered Pension Plans as currently designed should be avoided by many low- and middle-income Canadians.
However, the report, entitled Pooled Registered Pension Plans: Pension Savior — or a New Tax on the Poor? says PRPPs could be vastly improved by changes to tax rules.
"As currently proposed, PRPPs present only the appearance of reform because they are for the most part a re-release of an existing retirement savings vehicle —RRSPs with a new coat of paint," said James Pierlot, a pension specialist and member of the Pension Policy Council of the C.D. Howe Institute.
Introduced for federally regulated employees in June, PRPPs are intended to improve pension coverage and retirement-saving outcomes by reducing costs and improving investment returns through asset pooling and third-party administration.
But since most employers under federal pension legislation are already providing pension coverage to their employees, the expectation was that most provincial governments would follow the federal lead and adopt PRPPs for the vast majority of Canadian workers, who are under provincial jurisdiction. So far that has not been the case.
Minister of State for Finance Ted Menzies defended PRPPs as a new tool to help Canadians save differently.
"That's why our government introduced the TFSA — the most successful savings tool since the RRSP. We are now expanding the retirement savings system with PRPPs," he said in a statement Thursday.
"Taken together, these products are providing more savings options for more Canadians than ever before."
But the Howe Institute study says PRPPs represent only a mild improvement over existing options such as RRSP and defined-contribution pension plans because tax rules for all three are essentially similar.
As a result, that will prevent many private-sector workers from saving enough for retirement and from receiving retirement income in the form of a life pension, the Howe Institute says in a release.
"Worst of all, as the authors show, PRPPs should be avoided entirely by many low- to middle-income workers, who will face taxes and government-benefit clawbacks on PRPP retirement benefits at rates that are significantly higher than the refundable rates that apply to contributions," it says.
Among the recommendations by authors James Pierlot, a principal at Pierlot Pension Law, and Alexandre Laurin, associate director of Research, at the C.D. Howe Institute:
— PRPPs should allow tax-free accumulations — possibly in new tax-free pension accounts — so that low- and middle-income workers do not face punitive effective tax rates when they retire.
— PRPP members should have the option of accumulating self-funded, target pension benefits under the same rules that apply to the federal government's workers and to members of other defined-benefit pension plans, but which are not available in RRSPs, defined contribution plans and the proposed PRPPs.
— Lifetime accumulation limits should be introduced to help level the playing field with defined-benefit pension plans and to provide equal access to tax-free pension saving.
— PRPPs should also be allowed to pay out retirement savings as lifetime pensions, which only defined benefit plans are now allowed to do.
Also on HuffPost:
Big Canada Pension Plan Changes Coming In 2012
Ottawa is bringing in a raft of new or tweaked policies to reflect that retirement these days is more of a gradual transition for many people rather than a single event. Many of these changes either begin in 2012 or are entering the next phase-in period, and they'll have a direct impact on the retirement plans of Canadians. In some cases, the changes are big enough that people nearing retirement may want to have a chat with a financial adviser before deciding exactly when to apply for a CPP retirement pension. (Justin Sullivan/Getty Images) <em>With files from CBC</em>
1. Early CPP, Lower Benefits
The first change involves payment rates. People can choose to take a CPP retirement pension as early as age 60. But there's a catch: A 0.5 per cent reduction in the pension payout for each month before age 65 that someone begins receiving it. That translates into a retirement benefit that's 30 per cent less at age 60 that it would be if you waited until 65. Starting in 2012, Ottawa is beginning to phase in a bigger reduction to get that early access. For 2012, the penalty rises to 0.52 per cent per month -- or a 31.2 per cent reduction for someone who starts receiving their retirement pension at age 60. The early-bird reduction will continue to rise until 2016, when it hits 0.6 per cent per month, or a maximum 36 per cent reduction for those who start receiving CPP payments at age 60 rather than waiting until they reach 65. (Getty)
2. Later CPP, Bigger Benefits
Similarly, those who wait until after the age of 65 to start collection CPP will get a bigger increase in their retirement benefit. Before 2011, the rules stated that the CPP retirement benefit was boosted by 0.5 per cent for each month after age 65 that an individual put off receiving it. So someone who waited until age 70 would enjoy a 30 per cent boost in their payments. But starting in 2011, the government began to phase in a gradual increase to that delay bonus. For 2012, the increase for each month after 65 that a person delays applying for CPP goes to 0.64 per cent -- or a maximum increase of 38.4 per cent for those who start receiving a pension at age 70. By 2013, the maximum bonus moves to 42 per cent. These changes won't affect people who are already receiving CPP benefits. They are being made, according to Service Canada, to restore these adjustments to "actuarially fair levels," so there are "no unfair advantages or disadvantages to early or late take-up of CPP retirement benefits." (Getty)
3. Drop-Out Years Increase
Canadians currently don't need to contribute to the CPP every year from age 18 to age 65 to get a full CPP retirement pension. When someone's average earnings over their contributory period are calculated, 15 per cent of their lowest earning years are automatically ignored when the calculation is made. For someone who takes their CPP retirement pension at age 65, that means seven years of low or zero earnings are dropped from the equation. But starting in 2012, that "general drop-out provision," as it's called, goes up to 16 per cent. For someone eligible for CPP benefits in 2012, that will allow up to 7.5 years of the lowest earnings to be excluded from the calculations -- boosting the retirement benefit paid. In 2014, the percentage will rise again to 17 per cent, which will allow up to eight years of low earnings to be dropped. These changes can really benefit people who entered the workforce late, who were unemployed for a long time, or took time off to go back to school. One point to note is that there are separate drop-out provisions specifically for time spent out of the workforce because of disability or to have children. (Alamy)
4. 'Work Cessation Test' Dropped
CPP rules used to require that someone stop or drastically reduce the amount they earned during the two consecutive months before they began to receive a CPP retirement pension. This was, for many Canadians, an annoying and costly requirement -- especially since so many people now ease into retirement instead of stopping work completely. Now, that rule is history. Beginning in 2012, the "work cessation test" has been eliminated. (<a href="http://www.flickr.com/photos/misteraitch/" target="_hplink">Flickr: misteraitch</a>)
5. Post-Retirement Benefits
There's another rule change that's important for semi-retirees to be aware of. Before 2012, if someone started receiving a CPP retirement pension early -- say, at age 62 -- they didn't have to make any CPP contributions if they decided to collect payments but also keep working after age 62. Starting this year, if you are under age 65 and continue to work while also drawing a retirement pension, you and your employer must make CPP contributions. The good news for employees is that these extra contributions will be credited to what's called a Post-Retirement Benefit (PRB), which will result in a higher CPP retirement pension in the year after you make contributions to your PRB. This measure is a nod to the reality that many "retired" Canadians are still working. Canadians who continue working after age 65 and are receiving a retirement benefit will have the choice of whether or not they want to make CPP contributions. If they choose to make them, their employer must kick in their share too. Those additional contributions will go towards higher benefits beginning the year after the PRB contributions. (<a href="http://www.flickr.com/photos/elwillo/" target="_hplink">Flickr: Keith Williamson</a>)
6. Premiums And Benefits Rise
CPP benefits are always adjusted to reflect the rising cost of living. For 2012, the increase in benefits is 2.8 per cent. That will bring the maximum monthly CPP retirement pension to $986.67. Contribution rates are unchanged. But since the yearly earnings maximum that the rate applies to is going up, the maximum annual contribution will rise by about $89 in 2012 to $2,306.70 for both employees and employers. (<a href="http://www.flickr.com/photos/redvers/" target="_hplink">Flickr:R/DV/RS</a>)