Canada Pension Plan Expansion: Why It Matters

Finance Ministers from across the country meet today in Vancouver to discuss CPP expansion. At stake is not just about whether we should expand the Canada Pension Plan, but how it should be phased-in and who will benefit.

One proposal will see sweeping changes across the board both in terms of higher benefits and premiums paid by all workers. Another scenario targets specific segments of the population without employer pension plans who may not be saving enough for retirement.

CPP expansion requires support from the federal government plus seven out of 10 provinces representing two-thirds of the country’s population.

What happens in Vancouver today could set the stage for the first major CPP reform in 20 years. Here’s why Canada Pension Plan expansion makes sense:

Canada Pension Plan Expansion

Canadians need to save for retirement and many of us are not doing a very good job of putting away money for our future.

CPP is a way for every working Canadian to have access to a defined benefit pension plan that will provide up to one-quarter of the national average wage in retirement.

Canada Pension Plan Expansion

In an age when employer pension plans are fading away and average Canadians are coping with the highest debt-to-income ratio in our history, it’s imperative of our government to revisit mandatory savings plans to ensure the financial well-being of our post-retirement citizens.

I work in the public sector, so I’m one of the lucky three in 10 Canadians who still have a defined benefit pension. I contribute approximately 12 percent of my salary toward the plan, which my employer matches, and that pension will form the bedrock of my income in retirement.

But what do I hear from my co-workers and newly hired employees? It’s not gratitude that they have access to such a rich savings plan. No, instead it’s more like this:

“I wish such a big chunk of my paycheque wasn’t going into this pension plan. I could really use that money right now.”

I’m sure some of you would rather take the reins and invest that money on your own rather than being subject to the whims and restrictions of a public pension plan.

I trust that many of you would invest those funds wisely and maybe, just maybe, could even end up with more money at the end of your career.

But what happens to the 80-to-90 percent of employees who may not be such good stewards of that extra money?

We could argue that people need to make better and more responsible financial choices but the fact is that savings rates for Canadians are very low by historical standards and the average Canadian family saves less than $1,500 per year.

Voluntary or Mandatory?

One area that CPP expansion will discuss, among other things, is whether to make the additional contributions voluntary. But Canada already has voluntary savings plans in the form of RRSPs and TFSAs, vehicles that Canadians don’t even come close to maxing out.

When given the choice between consuming now and saving for later, most people will choose to live for today.

Imagine instead of mandatory payroll deductions, my colleagues and I had to opt-in to our workplace pension program: How many would willingly choose to contribute?

Behavioural economist Dan Ariely shared a fascinating chart that explained the psychological difference between opting-in and opting-out. He said countries in which organ donation was the default option had a nearly 100 percent participation rate among its citizens, whereas countries that require citizens to opt-in to consent to organ donation had a remarkably lower participation rate (between 4 and 27 percent).

We need CPP expansion, not because we need another “tax” on our income, but because we all benefit from living in a society that takes care of its citizens and doesn’t leave its old, disabled, widowed, victims, or simply unlucky in the lurch.

How should CPP expansion be rolled-out?

First off, anyone without the luxury of a defined benefit pension plan should be automatically enrolled into a newly expanded CPP.

Forget government workers and public sector employees – they’ll be fine. It’s the other 70 percent of the workforce without access to a workplace pension who needs the expanded program to help fund their retirement savings.

I’m also not worried about seniors today; the vast majority won’t be eating cat food in their old age – far from it.

Retirees today represent the last era of gold-plated pensions (for both the corporate and government worker) and saw unprecedented growth in the housing market, which translated (or will translate) into enormous, tax-free wealth.

Instead, think of today’s 30-something employees living in one of the larger cities in Canada. They’re starting to get established in their careers, maybe settling down and getting married. But their employers don’t offer a pension program, or even health benefits for that matter, they’re still paying off student loan debt, and they’re trying to save up for a down payment on a $400,000 condo.

There’s no chance they are saving for retirement unless it’s through some form of mandatory savings program.

So how will they afford these additional monthly CPP contributions when they’re struggling with so many other competing priorities?

People remarkably find ways to adapt to the money available in their chequing account. If they have $800, they’ll find a way to spend $800. But if they only have $600 (because $200 went toward expanded CPP contributions) they’ll find a way to spend $600 and be okay.

That’s the power of forced savings and paying yourself first. If it’s there, you’ll spend it. If it’s not there, you won’t miss it.

One interesting piece of research that came out of the Ontario government’s proposed Ontario Retirement Pension Plan was that, after accounting for some reduction in personal savings in response to ORPP contributions, personal household savings should increase by an average of 25 percent thanks to the ORPP.

Interestingly enough, it’s people with pension plans that tend to save more outside of their pension than their private sector non-workplace pension counterparts. Saving begets more saving!

One added benefit of enhancing a program on a massive scale such as the CPP – lower fees.

Canadians currently have over one trillion dollars invested in mutual funds and pay the highest investment fees in the world. Your investment advisor won’t agree with more of your paycheque going towards a low-cost and well-run vehicle like the CPP, but investors might be better off with less of their money going into high MER mutual funds.

Final thoughts

We’re not all trying to keep up with the Kardashians; many Canadians are legitimately struggling to get by and that is the point of widening the safety net of CPP.

We need to recognize that it’s damn tough to save in today’s economic climate. Think of the couple that wants to start a family and diligently saves 10 percent of their paycheque every month to put towards a down payment on a house in a year. But in a year, the cost of the house they were looking at has risen by 20 percent. That’s a difficult situation.

Sometimes we act like there are only two types of people, ants and grasshoppers, while ignoring all the nuance in-between, such as the unlucky or ill-timed entrepreneur whose business failed.

Increase the band of CPP so that our contribution rate is a little bit higher and the yearly maximum limit is a little bit larger so that society as a whole can benefit from the increased savings, and in turn, the increased consumption in retirement.

Then design some favourable and flexible rules around the self-employed or those who are already blessed with a defined benefit pension.

The last thing I haven’t touched on is longevity risk and the very real possibility of outliving our savings in retirement. Our needs may change and healthcare costs may become a major challenge.

Wouldn’t you rather have access to a predictable monthly income that rises with inflation and is guaranteed whether you live to 70 or 120?

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  1. Furnie Bird on June 20, 2016 at 6:30 am

    I’m not sure that I agree with all of this. It promotes lack of personal responsibility. It says that people are not capable of putting aside $200.00 a month voluntarily but they are capable of making do if the government takes it away from them.

    It is in such contrast to the greatest generation who did not feel entitled to having it all and now. In that generation people worked hard and lived modestly with sometimes millions in their accounts.

    Now a days its just the opposite. At least people pay into this but I do think its sad that the government has to take care of us because today people in general are not capable of taking care of themselves.

    In the past CPP was considered a supplement and now the government has to play a more major role because people can’t do what their grand parents did.

    I realize these are different economic times but I also think that we are different people now. Back then 16 year olds were going to war and now the 22 year olds live in grandma’s basement getting stoned every night and not paying grandma any rent because grandma even though she is poor doesn’t think he is capable of doing it and so he isn’t.

    Grandma is also trying to be hip and so doesn’t mind the stoned grandson or the fact that he has money for his drug habits but not for her.

    We are so screwed up now that people see nothing wrong with this picture. Someone like this will surely need some one else to take care of him when Grandma is gone.

    • Michael Corrigan on February 2, 2018 at 4:54 pm

      The Canadian Government does not contribute to the CPP.Employers
      and Employees do the Government should have nothing to do with CPP.

  2. Des Odjick on June 20, 2016 at 6:41 am

    I’m totally on board with expanding the CPP for all the reasons you outlined here! I’m also an Ottawa resident, so as you can imagine, I know a *lot* of people who will retire with public service pensions, haha – one of the most interesting (and for a private sector employee, *baffling*) reactions I’ve heard when I bring it up is “Yeah but who knows if it’ll even be around” or “I’m so nervous about retirement.” Have you heard anything like that from younger public sector employees? Every time someone says something like that, I kind of want to remind them that they have won the retirement lottery, but to be fair I don’t know anything about the realities of public sector pensions. Do you think it’s just not being communicated to them?

  3. Michael James on June 20, 2016 at 6:59 am

    I’ll be watching for whether proposed CPP changes involves giving more money to existing retirees. If people pay more into CPP, they should get more out. And if they don’t pay extra into CPP, they shouldn’t get more out.

  4. Eric on June 20, 2016 at 7:32 am

    It’s interesting that you mention longevity risk as a point in favour of expansion. Under the current rules, I see longevity risk as a big flaw with CPP when planning retirement as a couple. If both my spouse and I earn maximum CPP and I die after receiving my first payment at 65 (or 60, 61, etc), my spouse cannot receive any survivor benefit. Since she is already getting the maximum individual benefit, she is out of luck. Compare this with any funds I have invested myself. Those assets (and any income stream they produce) will pass 100% to my spouse. Unfortunately, extended periods of widowhood (or less often, widowerhood) are statistically common. For anyone in a relationship, who earns the yearly maximum pensionable earnings amount or above during their working life, current CPP rules are a quietly ticking time bomb tucked away in their retirement plan. If they (and their spouse) are legally obliged to contribute even more during each month of their working lives, that’s more money that will be lost forever upon the death of one half of the couple. To me, that’s a more pressing longevity risk for a lot of Canadian couples.

  5. Keith on June 20, 2016 at 8:19 am

    Saving for retirement has five success factors. You need to put away a large enough sum of money, over a long enough period of time, at a high enough rate of return, with low enough risk, at a low cost.

    We don’t self insure against fire, we insure collectively. We don’t self insure against major medical issues, we insure collectively. The idea that the average person can complete those five requirements as a retail investor with little or no investment knowledge is laughable. Even if you can satisfy the first four requirements, paying 2.5 percent MERs guarantees you will underperform the average large scale pension scheme. Honestly, how many working stiffs are on their way to a seven figure retirement fund that would provide 40k in retirement income?

    The death of the private sector pension scheme, high levels of student debt, unaffordable real estate are all huge factors that reduce the net worth of the current generation. There will be huge consequences in thirty to forty years, but politicians have a history of avoiding tough choices and kicking the problems down the road.

    CPP replaces 20% of working income, if you qualify for the maximum, which most people don’t. It should be revised and funded to replace 50% of working income, equally funded by employer/employee and capped at 50k max. Workers can go privately if they want/need more in retirement. Imagine the economic boost from pensioners with a secure pension that provides a decent living in retirement.

    Furnie Bird – CPP was a supplement to the company pension plan – which is gone or has been replaced by a group RRSP plan, with no guarantees and subject to market fluctuations. Guess how that’s working out.

  6. fbgcai on June 20, 2016 at 4:58 pm

    Whatever happened to self reliance? Everything now seems to “the government will take care of it/me” – personally I have zero desire to taken care of by government silly servants and their bureaucracy.

    Expanding CPP just becomes another tax on be passed on by the employer while it stifles cash flows for self-employed folks (they get to pay both the employer and employee portions).

    @ keith why stop at 50% salary replacement? why not 100%? why not let the twits run the entire show a la USSR a short while back – that worked out well didn’t it?

    If anything we should aiming at REDUCING government involvement in people’s lives not increasing it.

    • Keith on June 21, 2016 at 8:32 am

      Whatever happened to self reliance? I don’t know, and it doesn’t matter. You can argue that people “should” this or that all you like. What matters is what people are, or are not doing. They are not saving enough for retirement, or not at all .

      The landscape shifts so much within the markets, it’s almost impossible to be successful as an amateur investor. Look at interest rates in the last 60 years alone. 4% thirty year mortgages in 1959, up to 21% by 1981, now 2.5% or less for five years. Retired 15 years ago and relying on GIC’s? Good luck with that.

      The proposal on the table amounts to $1 per day, fully phased in. Not quite a totalitarian communist state in the making.

  7. Echo on June 20, 2016 at 5:45 pm
  8. CJG on June 20, 2016 at 6:09 pm

    CPP is not THE GOVERNMENT! It is you and your employer contributing to a retirement fund from which you withdraw in proportion to what you contribute.

    “CPP is really a defined benefit pension plan, which is not part of government assets. Canadians and their employers make contributions into CPP through their paycheques.” from Retire Happy.

    Not a tax but a mandatory savings plan – same as what most parents do to teach children how to save!

    • fbgcai on June 20, 2016 at 7:02 pm

      @CJG you’re saying CPP is NOT run by the government? Really! could have fooled me since the government ministers are meeting to “enhance” it. Oh and not paying those premiums will get you in a bunch of deep doo-doo with guess who?.

      btw Robb you mentioned opting in as a default being a good thing – I agree trouble is participation is Mandatory so opting of any sort is not on the table.

  9. Paul N on June 24, 2016 at 4:41 pm

    Good article and good comments (even if i don’t agree), really lays out the two sides of the argument. One side arguing on a little self discipline, seems like we have some Bernie Sanders type thinkers posting here as well. Eric and fbgcai said most of what I would have posted as well.
    I find it also disingenuous of many of the left politicians on tv and radio referring to the high side of the payout of $17,000.00.
    In order to even achieve the $13,000.00 now, someone has to work long and hard, and have a pretty high salary for 20 of those years… I quote :
    ” To qualify for the maximum, you must not only contribute to CPP for 39 years but you must also contribute ‘enough’ in each of those years. CPP uses something called the Yearly Maximum Pensionable Earnings (YMPE) to determine whether you contributed enough”
    Does anyone know the new rules? I suspect to get the $17,000 it will be an even higher carrot to reach. But it sure sounds nice to only speak of the possible benefits on CBC, without laying it all out.

    The average pension payout in 2016 is $550.00… I don’t see that really changing drastically. Also is all this not just a lot of smoke and mirrors? When you add OAS and GIS and other helpful supplements for low income earners, isn’t it actually a pretty fair system already?

    I think this whole debacle is more for “feel good” votes than it is to help people… Also those companies that do offer a decent DC plan now may simply cut back their match or start reducing plans a few points, because they will have to pay out the additional 1% in 3 years time. Hey if the politicians say its all rosy now, why should companies even offer plans? Business will adjust and not in a good way.

  10. Brian Wightman on July 16, 2016 at 3:52 pm

    Problems I see with this plan are with the future premiums required to maintain the benefits. For people earning around the YMPE of approximately $55,000.00 the plan is to move from covering 25% of earnings up to 33% of earnings. That is a hefty 32% increase in benefits. ((33-25)/25) This will funded by employees and employers each increasing their premiums from 4.95% to 5.95%. That is only a 20% increase. (1.0/4.95)
    Are we expecting bigger returns from the CPP ? Is there already a massive surplus ? Not likely. More likely is current politicians lay out a plan that they know is inadequate, but of course they will be long out of office by the time premiums needs to be ratcheted up.
    The entire history of CPP is based on over promising and then putting the costs on succeeding generations. The premiums are almost always behind what is required.
    The last big change to the CPP was in 1997. From 1997 to 2003 premiums for employees and employers went from 3.0% to 4.95%. That of course was a whopping 65% increase in premiums to basically just maintain the benefit levels that exist today.
    This group of politicians is setting up the future the exact same way.

    As an further note, let’s not forget the self employed people out there. They get the pleasure of paying both portions each year. The maximum premium for 2016 for these people will cross the $5,000.00 mark for the first time.
    Let’s consider a self employed housing contractor in the year 2025 making say $85,000.00. The premium at the end of the year will be in the $8,000.00 range. This person in Ontario must also cover themselves under WSIB for another $7-10,000.00 depending on the specific industry.
    It should not be too hard to figure out why construction is the top industry in the underground economy.

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