Home Page Election 2019 News Opinion Foreign Policy Politics Policy Legislation Lobbying Hill Life & People Hill Climbers Heard On The Hill Calendar Archives Classifieds
Hill Times Events Inside Ottawa Directory Hill Times Store Hill Times Careers The Wire Report The Lobby Monitor Parliament Now
Subscribe Free Trial Reuse & Permissions Advertising
Log In

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
Share a story
The story link will be added automatically.

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.

Politics This Morning

Get the latest news from The Hill Times

Politics This Morning

Your email has been added. An email has been sent to your address, please click the link inside of it to confirm your subscription.

Easing of restrictions to non-U.S. travellers into Canada unlikely to be met with Trump backlash, could pave way for reopening of 49th parallel, say experts

News|By Neil Moss
'The core operating ideal within ... Ottawa is evidence-based policymaking and there are clearly other jurisdictions out there besides the U.S. that have done a better job in containing [the virus],' says Eric Miller.

‘Weak’ trade growth in 2019 caused by ‘trade policy uncertainty’ and ‘mixed economic signals’, Global Affairs report suggests

News|By Neil Moss
Canada's export growth with China declined by 16 per cent in 2019 and growth in exports to the United States slowed to 2.5 per cent.

Fundraising amid pandemic ‘incredibly difficult’ for Green leadership hopefuls as Paul takes clear lead

The second- and third-place fundraisers are hitting the road, holding socially distanced campaign events across the country as they try to close the gap with leader Annamie Paul.

Venezuela winter elections will be fraudulent, warns envoy, calling for continued support

Last November, Canada officially recognized Orlando Viera-Blanco, a representative of interim president Juan Guaidó, as the country’s ambassador.

‘Extraterritorial reach’ of national security law in Hong Kong could have chilling effect on freedom of speech in Canada, say activists

News|By Beatrice Paez
Cherie Wong of the Alliance Canada Hong Kong says Canada’s intelligence and police agencies appear to be ill-equipped to respond to the 'malicious and sophisticated' ways in which Beijing allegedly suppresses criticism.

WE was ‘at no point’ creating a program for feds, says top bureaucrat

News|By Palak Mangat
'There were many sources. Public servants wanted to help; ministers wanted to help. A problem had been identified and a multitude of ideas were put forward,' says Privy Council Clerk Ian Shugart.

Upper Chamber staff harassment ‘more widespread,’ and could happen again, say former Don Meredith Senate employees

Sexual harassment is ‘more widespread’ in the Senate than the Don Meredith case, says one of his former staffers.

Would-be Conservative leaders wooing Quebec dairy farmers, but organizers say they won’t decide the race this time

With Maxime Bernier out of the party, dairy farmers don’t have a supply-management bogeyman to unite against this time.

‘Prudent, gradual, and phased-in’: public servant return-to-worksite plan slowly unfolding seven weeks in, but ‘no single date’ yet pinned down

News|By Mike Lapointe
Federal departments and agencies are taking numerous precautions and adapting worksites to meet physical distancing requirements, according to the Treasury Board.
Your group subscription includes premium access to Politics This Morning briefing.