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Why CPP Matters: Deconstructing Pension Reform

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If you believe that Canadians are not saving enough for their own retirement and many face a much lower standard of living when the paycheques stop, then you would be in good company with senior economists, pension experts and even most politicians.

Canadians are not using RRSPs enough, and those that do are in the higher income brackets. The people who need help saving for retirement are those earning under $100,000 -- i.e. most Canadians.

So the goal is to ensure that any change has broad effect and target the reasons why people are not saving.

Some say they don't earn enough to set anything aside. Ensuring that there are enough good-paying jobs so that people can afford to save is a top priority. It isn't an excuse to do nothing to secure their future. But how much are we talking about?

One proposal to increase the Canada Pension Plan will require additional contributions -- about $20 a month more for someone earning $40,000, matched by the employer. Those with higher incomes pay more to get more. Dollar for dollar, the CPP is the most cost-effective way to purchase a lifetime pension and arguably, at these rates, eminently affordable.

The key is that the employers match these contributions. Matched contributions makes the savings more productive for the employees but have also become the main talking point of employer lobby groups who call these modest amounts "job killers." Presumably, employers would rather forego hiring a needed worker than pay $20 or $60 a month more in CPP premiums. Despite evidence to the contrary, government believes them and thinks that stance is good public policy.

There is a myriad of ways to invest savings, maybe too many -- another reason people shy away -- but leading experts say that the best and most cost-effective for the average person is to put money into a large fund like the CPP managed by professionals who have access to better investments, keep costs low and maximize benefits.

Most important, a large fund stands the best chance of guaranteeing that benefits will be there when needed. The problem is that most employers don't offer pension plans and the CPP provides a maximum of $12,000 a year, the average is closer to $7,000.

So if an increase to CPP is good for Canadians why isn't it good for the economy? The just released Economic Statement paints a rosy picture but the finance minister still says that economic growth is too slow to allow any increase to CPP premiums. But presumably, the projected balanced budget in 2015 will allow for his promised tax cuts and income splitting. At least we can use the tax savings to contribute to a secure pension plan if we have the option.

Pension contributions are not taken out of the economy; they are immediately reinvested, creating jobs and bolstering business growth. The pension benefits paid out are taxed and spent in the economy. Most important for government coffers is that not only are these pensions not government payouts -- they're bought and paid for by the pensioners -- they actually offset Old Age Security and Guaranteed Income Supplements that government would otherwise pay.

And it bears repeating that only the younger generation will benefit from any improvements to the CPP which has enough to pay out benefits for the next 75 years. Everyone pays their own way.

So what's holding things up? For all the political posturing since the finance ministers first offered a modest CPP enhancement in 2010, there has been little to show for it.

To amend the CPP, two-thirds of the provinces with two-thirds of the population must agree together with the federal government. At last count, Quebec was in along with Ontario, PEI and enough others to achieve the necessary provincial consensus -- confirmed in their recent declaration that any pension reform must include CPP enhancement. That leaves the federal government as the major holdout.

Minister Flaherty is due to meet his provincial counterparts in mid December -- another chance for Canadians to find out if political rhetoric will prevail or if we will take the first step to improving Canada's retirement security for a generation.