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Why an expanded CPP is the right step forward

A version of this commentary appeared in iPolitics.ca, the Winnipeg Free Press and the Brandon Sun

Brown_Cpp reform_31030140_Dec 2013Small and mid-size employers continue to walk away from sponsoring workplace pensions.  Today less than 40% of private sector workers have any workplace pension at all and less than 20% have Defined Benefit pensions that experts agree are the best way to guarantee retirement income security.

Now, those very same employers, who are denying their workers pensions, are also arguing that workers should not have the right to achieve higher levels of retirement security through an expanded Canada Pension Plan (CPP).  They are pitting younger workers against older workers and retirees by claiming that any expansion of the CPP today will benefit only the elderly — but that the funding of these new benefits will have to be met by younger Canadians in the form of increased contributions.

We are routinely told by ill-informed pundits that this is another example of those greedy geezers adding to their benefits and passing the bill to the next generation(s).  It’s a compelling spin, but it’s not accurate.

If you are a “younger” Canadian, it is time to consider the truth of the matter.

Which world would you prefer?  First: A world where employers increasingly provide no pension benefits whatsoever; where Canadians don’t save enough for retirement income security; and even if your parents do save, their investment earnings will be low and, because they end up paying some of the highest management expense fees in the world, are virtually zero.

This is a world of two possible outcomes.  One is that your parents will come to you and ask you to help support them in their retirement either by sharing food and shelter or by providing them with extra income to make ends meet.  Or, the second possibility is that your parents and their entire generation will fall back onto Guaranteed Income Supplement (GIS), Canada’s retirement income welfare system.  They will do so at very high levels because the remaining baby boomer cohort is now moving into retirement and it will be younger Canadians picking up the tab; they will pay those GIS benefits through increased taxation (that is how GIS is financed).

Or, perhaps you’d rather a world where the CPP is moderately expanded today and where middle class Canadians can now (and in the future) retire at a level that guarantees they will not slip into poverty. If a CPP expansion were agreed upon today it would still take several years to implement. This period of time would include the required legislative and administrative changes, a notice period for Canadians, as well as a phase-in of the new contribution rates required to fund the expanded CPP.  So, now is the time to act.  Further delays cannot be supported.

Younger workers, when they retire, will also get these new improved larger benefits.  The ultimate goal of any CPP enhancement would be to improve retirement income security for all Canadians.

For younger Canadians, another factor significantly protects your generation from paying increased contributions into the CPP if the system runs into sustainability problems.  The CPP legislation contains an Automatic Balancing Mechanism (ABM).  Under this ABM, if the current 9.9% contribution rate cannot sustain the CPP as it now stands, and if politicians cannot find a palatable solution to this financing issue, two things automatically happen.  First, the indexation of benefits to the cost of living stops.  This will bring pain that will be borne by the elderly.  That is their share of the load.  Second, contributions from workers (matched by their employers) would increase half-way to what would be needed to immediately provide and guarantee sustainability.  That contribution increase would be the share to be borne by younger Canadian workers and their employers (50/50 split).

So, despite what you are being told, CPP expansion does not automatically mean that only the elderly benefit — all Canadians would be the recipients of an improved system.  And if the CPP were to run into some problems of sustainability, it is not true that only the young suffer; the costs would be borne across generations.

Robert Brown is an expert advisor with EvidenceNetwork.ca and a Fellow with the Canadian Institute of Actuaries. He was Professor of Actuarial Science at the University of Waterloo for 39 years, a past president of the Canadian Institute of Actuaries, and incoming President of the International Actuarial Association. 


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November 2013