For the past three years, two rival ideas have battled to become the go-to solution for enhancing retirement savings in Canada: expanding the Canada Pension Plan, and private-sector savings vehicles known as pooled registered pension plans. To date PRPPs have had the upper hand, with backing from the federal government and four provinces. Recently, though, two provinces favouring Big CPP have counterattacked in the lead-up to the December meeting of federal and provincial finance ministers.
Prince Edward Island Finance Minister Wes Sheridan floated a scheme to enhance CPP for the broad swath of middle class. While not affecting anyone earning less than $25,000 a year, it would raise contributions for those earning $100,000 by 50%, or by about $2,325 a year combined from employee and employer. In return—after they contributed at the new rates for about 40 years—participants would see almost double the pension payout. Other provincial finance ministers conditionally endorsed the idea at a meeting in early November. Meanwhile, Premier Kathleen Wynne of Ontario has said her government might introduce a stand-alone Ontario pension plan if her cohorts don’t go along.
Seldom mentioned by these Big CPP proponents is the impact on employers, who kick in half of CPP contributions. “From the employer perspective it is purely a payroll tax hike,” says Dan Kelly, president of the Canadian Federation of Independent Business. Small and medium-sized-business owners would have to make up any CPP cost increases with reduced hiring and curtailed pay raises, he says—at a time when job creation is anemic.
The fundamental issue is whether the entire middle class and its employers should be forced to hike CPP contributions, when research shows that only a small minority haven’t saved enough to maintain their standard of living after retiring. Fred Vettese and Bill Morneau found in their book The Real Retirement that among recent middle-income retirees the “problem group” who have to tighten their belts substantially is estimated at 7% of households, whereas 60% find themselves better off in retirement. “When you’re talking about increasing CPP, everyone has to pay into it. It’s very hard to target,” adds Jack Mintz, Palmer Chair in Public Policy at the University of Calgary.
While Big CPP may be overkill, the issue with PRPPs is effectiveness. Alberta, Saskatchewan, British Columbia, Quebec and the federal government (for areas of federal labour-force jurisdiction) are at various stages of rolling out PRPPs. They were conceived as portable plans, easy for employers to administer, that combine individual savings in large investment pools to achieve professional management at a lower cost. However, the purely voluntary nature of these initiatives so far (except in Quebec) makes it doubtful many employers will even offer them. Unless those employers that don’t already offer registered pension plans are required to offer PRPPs, the new plans are “dead in the water,” says Vettese, chief actuary at human resources consultancy Morneau Shepell.
Vettese and other pension experts want new hires to be automatically enrolled in PRPPs, with a minimum default contribution deducted from payroll. The employee would be free to opt out, adjust the contribution level or choose another plan, and the employer would not be required to contribute. Experience from other countries suggests “if you do auto enrollment, the vast majority of people—probably eight people in 10—would stay in,” Vettese says.
While the CFIB doesn’t like employers being required to enrol their workers in PRPPs, it’s a preferable option to Big CPP. Says Kelly: “If there’s at least an option to get out, we’re not going to freak out about it.”