There is now a big push from various quarters (the Canadian Labour Congress and some notable academics, come to mind) to greatly expand the Canada Pension Plan (CPP). Indeed, finance ministers at the provincial and federal levels will be meeting in December to decide if the expansion should be put into effect. Let’s hope they don’t.
When the CPP was launched in the 1960s, its premiums were set at 1.8% of gross income. By the mid-2000s, they had climbed to 9.9%. When finance ministers meet in December, they will consider hiking them to as high as 13%. Also under discussion is a near doubling, to $100,000, in the cap on income subject to CPP premiums. These increases in contributions should help lift the percentage of income paid out during retirement to as much as 50% of a worker’s earnings.
Let’s sum up some objections to the proposals for a radical makeover in the CPP.
1. There doesn`t seem to be a real need for it. Poverty at the elderly level is virtually non-existent in Canada: according to the OECD’s Pensions at a Glance report, only 5% of seniors in Canada fall below the poverty line—the fourth lowest elder poverty rate in the world.
2. It overlooks major sources of retirement income, according to Carleton University professors Ian Lee and Vijay Jog. There may be only $1.6 trillion in registered plans, but an analysis of Statistics Canada’s National Households Balance Sheet shows $3.7 trillion in financial assets and $3.5 trillion in real-estate assets.
3. A jump in CPP premiums makes it more expensive for businesses to maintain a workforce and could lead to job losses. In fact, a Canadian Federation for Independent Business (CFIB) study claims over 100,000 jobs will be lost.
4. Self-employed persons pay both the employee and the employer portion of CPP premiums—so will be the hardest hit. This is undesirable since entrepreneurs take risks and deploy resources in ways that have positive spin-offs for economic growth, innovation and productivity.
5. Opportunity costs need to be considered. Resources allocated to the CPP will be unavailable for other priorities, some of which arguably merit a higher ranking. Case in point: health care services, where wait times for medical procedures have become unacceptably long.
6. If an enlarged CPP displaces private-sector pensions, as many proponents wish for, Canadians will be relying more on government for their retirement needs. Concerning this prospect, pension expert Paul Williams declares: “Think of our gang of politicians—Dalton McGuinty. Mike Duffy. Rob Ford. Think of other government projects—gas plants, fighter jet procurements, eHealth. You want to put most of Canadians retirement savings in the hands of government?”
7. As a government entity, the CPP is at risk of being unduly politicized. In past decades, for example, the CPP was compelled to invest all its funds in provincial government bonds. Also, the Quebec Pension Plan has traded off pensioner returns for the goal of promoting economic nationalism within the province.
8. The CPP comes with regulatory risk. By the time workers in their thirties and forties reach retirement, they will almost certainly find that the rules of the game have changed. A very real possibility, for example, is an increase in the retirement age to 67 (or older) for entitlement to CPP income. The upward trend in premiums could also very well continue.
9. The issue of intergenerational equity is a concern. Already, there is a huge transfer of wealth through the tax system from young adults and families to elderly people. CPP contributions are not a tax, per se, but expecting contributions to yield pay-offs 20 to 40 years down the road as advertised seems rather too trusting given the track record of government-run entities.
10. Increasing the transfer of wealth from young to old via higher CPP premiums isn’t something to celebrate. The transfer shares a good part of the blame for the financial squeeze that leaves young adults unable to afford a family of more than one or two children, as journalist Duncan Hood discusses in “The war against the family.” The significance of low birth rates, of course, is that there are fewer persons in the workforce to support the growing ranks of retirees. In a sense, then, the proposal to expand the CPP may have the perverse effect of worsening the situation that it seeks to improve.
Larry MacDonald is a former economist who manages his own portfolio and writes on investment topics. He is the author of several business books.