Above: Ottawa’s refusal to boost contributions to the Canada Pension Plan is forcing some provinces to take action on their own. Vassy Kapelos reports.
The topic of pension reforms has flared up in recent months as provinces, labour groups, business interests and trade bodies debate whether the country needs to rejig retirement savings schemes now to head off a potentially significant downgrade to the quality of life for millions of retirees in the coming decades.
Some provincial finance ministers urged Federal Financial Minister Jim Flaherty to move on reforms at a meeting in Quebec on Monday, but Flaherty is refusing to make changes to the federal Canada Pension Plan, stating the economy isn’t strong enough to support increased taxation to bolster the fund.
Below is a quick breakdown of what’s at issue:
Why is pension reform such a hot topic?
Experts warn Canadians aren’t saving enough, particularly those earning annual incomes of between $30,000 and $100,000 – the approximate benchmark for members of the middle class.
As savings rates have steadily declined in recent years, big pension fund managers and some government officials say the relatively high quality of life this group has attained risks being seriously diminished in retirement if new funding mechanisms aren’t put in place to prop up post-work income levels.
The focus of many of the current reform ideas would only apply (read: raise payroll taxes) on those earning $25,000 a year or more – or the biggest group of earners, tallying 14.6 million Canadians, according to Statscan data. Low-income earners are supported by Old Age Security and a program called Guaranteed Income Supplement, which are deemed satisfactory financial aids for this group for now.
The primary means of getting more retirement income to middle class Canadians would be through higher payouts from the Canada Pension Plan. But that might require significantly higher premiums paid by workers and employers.
How does CPP work, anyway?
The Canada Pension Plan was set up to pay retirees up to 25 per cent of their average annual income to a current maximum of $12,000, annually. The plan is funded by deducting a portion of income from individual workers, or about 10 per cent – half of which is paid for by your employer.
Individual payouts are determined by averaging annual income across a worker’s entire time in the workforce, excluding their seven lowest-earning years. To “max out” or receive the full $12,000 a year, an employee’s average income across their entire working life (save seven years) would have to tally at least $51,100, under the current rules.
CPP pensions can be accessed anytime after age 60 up to 70 years old, but two-thirds of Canadians take it before 65, according to Services Canada. Taking it earlier does carry a financial hit however, to the tune of 0.54 shaved from monthly payments for each month the fund is accessed before 65.
Under that math, monthly payouts for those who take it right at 60 are a third less than those who wait until they’re 65.
What are the current reform proposals?
Certain provinces, led primarily by Ontario and Prince Edward Island, want to increase mandatory contributions to CPP with the goal of substantially raising CPP pension payments – doubling the max payout, according to PEI Finance Minister Wes Sheridan, who wants to see payroll increases applied to businesses by as early as 2018.
Some, like the Canadian Labour Congress and NDP support increases across all income brackets, while Ontario and PEI officials say the reforms would exempt low-income earners. To fund an expansion of the CPP however would require an equally sizable hike to premiums paid by workers and businesses.
Critics of the forced savings schemes are proposing another model called Pooled Registered Pension Plans or PRPP. Under PRPPs, employees in companies without pension plans as well as the self-employed would be eligble to make voluntary contributions to a pooled fund that would be professionally managed. The payout would depend on individual contribution and return the fund would generate on its investments.
Watch: Ontario Finance Minister Charles Sousa slams Jim Flaherty for rejecting efforts to reform the CPP
Why is Ottawa against reforms?
Years of declining savings and increased household accumulation of debt has helped the Canadian economy perform well through a global downturn, but the outlook isn’t as rosy. Flaherty and policymakers are nervous about sky-high consumer debt levels and overheated housing market. Chipping away at incomes across most of the working population isn’t a sound idea at the moment.
Is the issue over — or just on hold?
On hold. Ottawa knows some adjustments to the plan will be required – Flaherty himself attempted modest reforms in 2010. The federal government likely wants to wait until Canadian household “imbalances” have been addressed – ie, household debt has declined — employment has improved and the economy moves toward full capacity. The Bank of Canada said last week it’s eyeing 2015 for that scenario to unfold at the earliest. Coincidentally, that’s also a federal election year.
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