Home Page News Opinion Foreign Policy Politics Policy Legislation Lobbying Hill Life & People Hill Climbers Heard On The Hill Calendar Archives Classifieds
Advertising Subscribe Reuse & Permissions
Hill Times Events Hill Times Books Hill Times Careers The Wire Report The Lobby Monitor Parliament Now

Do we really need an expanded CPP?

By Robert L. Brown      

We can continue to dither or we can act. If we are to act, finding an efficient and effective means of increasing retirement income security would clearly lead us towards a compulsory, large, defined benefit plan.

Finance Minister Bill Morneau has championed the expansion of the CPP. The Hill Times photograph by Sam Garcia

The Fraser Institute has argued recently that the federal government has failed to make a convincing case for Canada Pension Plan (CPP) expansion. But their viewpoint depends heavily on trying to determine how much income Canadians need to retire with dignity.

Do we require a 50 percent replacement of final earnings; or is it 70 percent?  Does spending go up or down when we retire?  Can you sell your house and move to a less expensive region?  Since none of these questions have solid, precise answers, the institute can claim the feds have not made the case for an expanded CPP.

Like many of you, I have wasted a few hours recently watching the U.S. Presidential candidates’ debates.  I often find myself shaking my fist at my TV screen yelling: “You have not answered the question!”  I feel the same way about the Fraser Institute analysis on CPP. While it is accurate, it does nothing to shed light on the matter at hand.

So, do we really need an expanded CPP?

Thankfully, we have solid Canadian research available to let us know if future generations of Canadian workers can retire with dignity.

A 2015 McKinsey report uses survey results and concludes that 17 per cent of the future elderly will suffer a decline in their standard of living in retirement.  A 2009 study prepared for the Research Working Group on Retirement Income Adequacy used income tax data and concluded that 22 percent of future elderly will suffer a significant decline in their standard of living.

Two other studies used the Statistics Canada’s LifePaths microsimulation model to simulate future outcomes.  The first, from the C.D. Howe Institute in 2010, suggests the future elderly will face declines of 44 percent, while a 2011 study from the Institute for Research on Public Policy shows a 50 percent decline in standard of living.

In other words, the best available Canadian data—even given that they vary substantially—all have the same bottom line: expect a significant decline in standard of living at retirement.

All four studies show that the risk of a declining standard of living in retirement is largely a middle-and upper-income earner problem, concentrated among the youngest age groups and those not participating in a workplace pension plan. For low-income workers, the combination of OAS and GIS will replace more than 100 percent of their final earnings.

Do these studies “prove” the need for expansion of the CPP?  No—no more than the Fraser Institute study made the case against expansion.

What the studies do demonstrate, however, is that a significant proportion of future Canadian retirees are going to suffer measurable deterioration in their standards of living.

So what should be done as a result?

One answer is to “do” nothing.  We’ve been doing just that for the last several decades and seen the steady erosion of retirement income security systems. Fewer workers today than a half-century ago have workplace pensions. Only 38 percent of employees participate in a Registered Pension Plan. And, clearly, Canadians are not filling the void with increased personal savings. Instead, they take on ever-increasing levels of debt.

Many employers have also stopped sponsoring defined benefit (DB) pensions, finding them costly. At the same time, the financial crisis of 2008-09 has shown the frailty of achieving retirement income security through defined contribution (DC) plans.

Workers without workplace pensions must manage their own investment creating investment risk. They can mitigate the risk by hiring an investment adviser, however, this only shifts the investment risk to an expense risk.

Advice can cost as much as three percent of the gross rate of return.  If funds earn, for example, five percent and inflation runs close to two percent, then that worker is actually receiving no real return at all.

They must also manage their assets to provide cash flows in retirement to cover their unknown life expectancy. Two outcomes are possible: One can draw down one’s assets very slowly to guarantee they don’t run out, but then live at a very low standard of living. Or one can live at a higher standard of living but run out of assets and fall back on taxpayer-funded welfare.

Study after study has shown that large defined benefit plans are more effective and efficient than accumulation accounts managed by individual workers since they can be operated with much lower investment expenses. Further, they need only accumulate enough funds to cover the average life expectancy of all plan participants. The fund can also invest in less liquid (and higher yielding) assets since the average life expectancy is known.

So, we can continue to dither or we can act. If we are to act, finding an efficient and effective means of increasing retirement income security would clearly lead us towards a compulsory, large, defined benefit plan.

Now, that just so happens to look a lot like an expanded CPP.

More in News

‘Crystal clear’ feds have jurisdiction on $7.4-billion Trans Mountain pipeline: here’s how they could ‘reinforce’ it

There’s no doubt that the federal government has authority to approve the Trans Mountain pipeline, says a pair of constitutional lawyers, and Prime Minister Justin Trudeau’s promised legislation to “reinforce” that right could sweep aside…

Liberals could revert to third-party status if MPs ignore constituents’ concerns, warns rookie Grit MP

News|By Abbas Rana
Liberals jumped from the third-party status to win a majority government in the 2015 general election, but they could easily revert to their pre-election status if Grit MPs don't reach out regularly to constituents before…

Senators still split on bringing outsiders onto new expense-audit committee, as Rules Committee study gets underway

Three years after Auditor General Michael Ferguson’s explosive investigation into Senate expenses, Senators still haven’t agreed on whether to include outsiders on a new committee to audit Senate spending. The Senate Rules Committee set to…

Federal spending up two per cent, hits $276.6-billion in main estimates for 2018-19

Federal spending is up by roughly two per cent this fiscal year, reaching an estimated $276.6-billion for 2018-19, with funding for the House of Commons and the Senate up by 6.5 per cent and five…

Senate seeks intervener status to back House BOIE in ongoing court battle with NDP

The NDP’s court challenge of the House Board of Internal Economy’s 2014 order for NDP MPs to repay almost $4-million in expenses continues, with the Senate now seeking intervener status to support the BOIE’s appeal…

New Liberal Party president says Grits have to fundraise hard to secure win in 2019

News|By Jolson Lim
HALIFAX—New Liberal Party president Suzanne Cowan says her party will have to step up its fundraising game at the local level in order to return the Liberals to a second majority government, as the Conservatives…

Liberals don’t need to change fundraising strategy, focus on ridings, says fundraising director at Halifax convention

News|By Jolson Lim
HALIFAX—The federals Liberals are currently behind the Conservatives in fundraising, but Liberal Party fundraising director Christina Topp says the party’s fundraising game plan hasn’t changed as the 2019 federal election inches closer. “The strategy has…

Sunny Trudeau convention speech turns into attack on Scheer

News|By Jolson Lim
HALIFAX—In a convention speech meant to fire up his party faithful before the 2019 federal election, Prime Minister Justin Trudeau today touted the Liberals' progressive record and a sunnier political vision, before blasting Conservative leader…

Grits’ ‘self-inflicted wounds’ serious concern for rank and file delegates, MPs, former senior Liberals at Halifax convention

News|By Abbas Rana
HALIFAX—It's a three-day happy gathering of about 3,000 Liberal Party faithful, but one serious concern still being talked about in the hallways and backrooms is the propensity for self-inflicted wounds by top strategists and Prime…