Over the last few weeks bloggers and mainstream media have been reacting to Finance Minister Joe Oliver’s surprise pre-election announcement of the government’s intention to add a voluntary component to the Canada Pension Plan. Here is sample of some of the buzz created by this proposal.
I wrote Voluntary CPP contributions will favour high earners on RetirementRedux and the blog was re-posted by John Chevreau on the Financial Independence Hub. I believe that too many questions remain unanswered and if voluntary CPP contributions are locked in until retirement, even when middle or low earners finally bite the bullet and set up a payroll savings plan, chances are they will opt for an RRSP or TFSA so they can get at the money in an emergency. Because employers probably won’t have to match contributions, there will be incentive for employees to contribute more money to CPP.
On Retire Happy, Jim Yih questions whether voluntary CPP contributions are a good idea. Yih also notes that the devil is in the details, and suggests that if there is no employer matching there is little difference between voluntary contributions to CPP or RRSPs (individual and group). Lower cost investing may be a plus but he says investors already have access to lower cost investments through Exchange Traded Funds (ETFs).
In the Globe and Mail, Bill Curry reports that the Conservative government rejected a voluntary expansion of the Canada Pension Plan five years ago as overly expensive and misguided, a history that is raising questions as to why it is now proposing that very idea. “This was rejected unanimously by our partners in the federation when we met and discussed the issue because it would not work and because the CPP would be unable to administer it,” Finance Minister Jim Flaherty told the House of Commons in September 2010.
In the StarPhoenix, Andrew Coyne writes Whether voluntary or mandatory, there is no need to expand the CPP. He says, “If people are saving about as much as they want to now, then forcing them to save more in one way, through an expanded CPP, may simply result in an offsetting reduction in their other savings, in their RRSPs or TFSAs.” He also opines that those of modest means are already well-served by the existing CPP and the further you climb the income scale, the hazier the case for public intervention becomes.
And finally, a Toronto Star editorial says Harper’s pension ‘fix’ falls short. This piece suggests that by far the best way to forestall a retirement income crisis would be to expand and enhance the existing, highly acclaimed CPP, by upping the input from employers and employees alike. With $265 billion in assets and an enviable 18.3% return last year, the plan has expert management, huge scale and a low-cost structure. Employers and workers pay equally, to a combined maximum of just under $5,000 this year. It locks in contributions over the long haul and it provides a safe, predictable retirement income.
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As part of the ongoing series of podcast interviews on savewithspp.com, today I’m talking to lawyer Ari Kaplan, a partner in the Pension and Benefits Group of the Toronto law firm Koskie, Minsky, L.L.P.
Ari is the author of Canada’s leading textbook on pension law, and he has acted as counsel in some of Canada’s most widely known pension cases before the Supreme Court of Canada. In addition, he teaches pension law as an adjunct professor of law at both the University of Toronto and Osgoode Hall Law School.
In his spare time, Ari heads up licensing and publishing at Paper Bag Records, a leading, independent record label and artist management company also based in Toronto.
Today, we are going to talk about the Canada Pension Plan. In the ongoing national debate regarding how Canadians can be encouraged to save more for retirement, Ari is a staunch advocate for an expansion to the Canadian Pension Plan.
Welcome, Ari, and thanks for talking to me today.
My pleasure, Sheryl. Thanks for having me.
Q: How many Canadians currently have workplace pension plans?
A: Well, that’s a good question to put everything in perspective. Over 60% of working Canadians actually have no workplace pension plan, and they must rely solely on CPP and their own personal savings for their retirement income.
Q: Why do you think that an enhanced Canada Pension Plan is the best way to give Canadians a more robust retirement income?
A: Very simple. It’s currently the only universal and mandatory savings scheme in the country. It’s portable from job to job. If you’re a student, you can work for the summer in British Columbia and then come back to a full-time job in Ontario, and your CPP credits will go with you. Also, it doesn’t just cover employees. It applies to self-employment, which most workplace pension plans don’t.
Q: As early as 2008, industry guru Keith Ambachtsheer wrote a C.D. Howe Institute commentary about the benefits of enhancing the Canada Pension Plan. Yet, in December 2013, the conservative government in several Canadian provinces voted against this proposal. Why do you think this occurred?
A: Every respected economist in the country supports a CPP expansion. The reason why the current government did not support it is political, not principled.
There was political pressure from business lobby groups who did not want to be forced to contribute employer revenue toward their employees’ retirement. There was political pressure from the financial services lobby, because they do not benefit at all when the retirement savings of Canadians is held in the CPP Trust Fund.
And finally, there’s fear among Canadian voters, who’ve been led to believe that anything opposed by business must be bad for them, too. Some of them also don’t want to be forced to save for retirement.
Q: Instead of expanding the CPP, the late finance minister, Jim Flaherty and the provinces endorsed pooled registered pension plan legislation as the way to encourage Canadians to save more for retirement. What are the key features of PRPPs?
A: Good question. PRPPs are basically like voluntary employer-sponsored group RRSPs. The funds are locked in, so it resembles a registered defined contribution plan. Your funds can also be ported to another plan and there are survivor benefits. So, it’s basically like an “RRSP-plus.”
Q: Why do you think that PRPP’s are not the answer?
A: Well, I think PRPPs are just a prime example of what I said earlier – political lobbying by business and the financial industry.
The employer is not required to contribute a dime even if the company voluntarily sponsors a PRPP.
An employee can opt out, or voluntarily set their contribution rate to zero, which gives zero benefit to the employee.
There’s very little benefit security. Like I said, it’s like a DC plan, so you get to choose member-directed investment funds. If you don’t invest your money well, then you won’t get a good pension.
The cost structure is really not that much different than a 500-member group RRSP. The management expense ratio (MER) will be much higher under a PRPP than under a large workplace pension plan or, for that matter, under CPP, where the efficiencies of scale are such that the costs are very, very, very low.
It will create a huge windfall to insurance companies and other financial institutions who manage these funds, because there’s very few cost controls. There are lots of problems in group RRSPs with so-called “hidden fees” and there’s no indication that that will change with PRPPs.
I can go on, but I think you get the idea.
Q: Groups such as the Canadian Federation of Independent Business say that required employer contributions to an expanded CPP would amount to a significant payroll tax that could slow down economic growth. How would you respond to this statement?
A: To be quite blunt, this is a false and misleading statement. Anyone who tells you it’s a tax is not telling you the truth. This is employee money. It goes into a pension fund. It then goes back to the employee.
Q: Ontario Premier, Kathleen Wynne’s government is currently holding consultations on the design of an Ontario Retirement Pension Plan. What are some of the key features of that plan?
A: At the end of December of last year, the Ontario government introduced the first reading of the bill for the Ontario Retirement Pension Plan intended to commence at the beginning of 2017. The reason for the delay period is because there’s hope that the next federal government may agree enhance CPP, which could make the ORPP redundant.
But the key features are that it’s a mandatory plan. It’s like an adjunct to CPP. So, it would be mandatory in all Ontario workplaces, except where the employer already has a workplace pension plan for its workforce, and it would be integrated with the CPP.
Q: Several other provinces, like PEI, may jump on the same bandwagon, so why do we still need a national CPP enhancement?
A: Well, it would better if the federal government came on board to make it nationwide. I mean if we just have it province by province, then it’ll be more of a patchwork. This could influence inter-provincial mobility. We don’t want to discourage full inter-provincial mobility by Canadians.
Q: Well – and, of course, the other issue is – just like pension legislation across the country, which is similar, but actually very different when it comes to the details – we run the risk of getting ten or 11 completely different plans.
A: And that would result in over-regulation and an increase in transaction costs although the whole point of this is to minimize and optimize the costs of running the fund — which is why CPP is good model.
CPP is viewed as one of the best universal, mandatory state-sponsored pension plans in the world. It would be a shame for us to have to rely on province-by-province, patchwork participation in such a scheme.
Also, you know, at the end of the day, this is really something that benefits all Canadians, regardless of what age or generation they are in. One way or the other, taxpayers will be taking care of older Canadians who are poor. It’s better that Canadians have their own resources to take care of themselves; and that’s an optimal use of taxpayer resources.
So, I just really think it’s a good idea, and I really think that this is the ballot question for the upcoming federal election this year. We saw this 50 years ago when CPP was introduced. I believe this year there will be a renaissance of that issue.
Q: Thanks, Ari. It was great to talk to you.
A: My pleasure, Sheryl. Be well.
—– This is an edited version of the podcast posted above which was recorded on February 3, 2014.
This week the country mourned the untimely death of Jim Flaherty, the former federal finance minister. In Goodbye Jim, Canadian Dream Free at 45 blogger Tim Stobbs says the most important lesson he learned from Flaherty is “life is short, so don’t spend all your time working.”
With the deadline for filing 2013 income tax returns extended to May 5th because of temporary system shutdowns due to the Heartbleed software bug, procrastinators have several more days this week to delay the inevitable.
However, there are some cases where it may be a good idea to defer taking tax deductions you are entitled to this year to a later year. In the blog Taxes: When it Pays to Procrastinate or Defer on Young and Thrifty we learn that you will get more “bang for your buck” on your RRSP deduction if you contribute this year but do not take the deduction until a later year when you are in a highrt income bracket. The same goes for your educational tax credits.
Financial Procrastination can also result in making bad financial decisions, says Dave on Canadian Dream Free at 45. For example, he recently accepted the first house and car insurance package offered to him, instead of making the time to shop around (a serious personal finance no-no).
For many people, the reason to scrimp and save during their working life is to leave a legacy for their children. But on Boomer & Echo, Marie Engen says if you have sufficient money to Leave A Legacy Before The Will Is Read, consider giving your children a financial boost when you are still alive to see them enjoy it. Helping with a down payment on a house, funding RESPs for your grandchildren and family vacations can be very gratifying.
Finally, Squawkfox questions Repair or replace: When does it make sense to mend the threads you’ve got? She says it depends whether the item is busted or just worn out. It costs $50 to repair the heel and sole her eight year old blue Fluevog boots instead of $350 to replace them so she opts for the repair. But she regretfully acknowledges that even good quality items won’t last forever.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.