Concerns about a so-called retirement income ‘crisis’ overblown

The following is an excerpt from the Macdonald-Laurier Institute’s policy paper from its series From a Mandate For to a Plan to Govern. The full paper can be found here. The new government has made improving Canada’s retirement income system among its policy priorities. The prime minister argues that the “pillars of retirement security to be strengthened” and that a CPP expansion ought to be part of the solution. The December meeting of federal and provincial finance ministers was the first opportunity for the government to advance this policy objective. The underlying assumptions behind the government’s support for a CPP expansion have not been fully fleshed out. The prime minister says that part of the problem is “economic strain” and the Liberal Party talks about the need to make the CPP “more generous” but thus far the government has generally favoured caution and incremental action. The recent inconclusiveness of the meeting of federal and provincial finance ministers may mean that there is room for a broader policy discussion about Canada’s retirement income system. Finance Minister Bill Morneau calls the agreement to further study a CPP expansion “an important milestone” and will meet with the provincial and territorial ministers in June to discuss the subject in more detail. This is a positive development for evidence-based policy, especially with Mr. Morneau leading the exercise. His thinking and writing on pension policy shows that he understands the nuances of the retirement income system and how best to measure its effectiveness. As he writes, “the foundation of our retirement system remains strong. There are cracks, but they appear to be manageable.” Recommendations to improve Canada’s retirement income system To the extent there are “cracks,” what targeted steps can the government take to fill them? While the evidence does not support a broad-based solution such as CPP expansion, that does not preclude Mr. Morneau from pursuing some modest, incremental reforms to Canada’s retirement income system. The minister said in a 2013 speech that the key is to ensure that government doesn’t “create a solution that is bigger than the problem.” This is a good basis from which to consider policy options. Here are three that would meet his criteria. The first step would be to update the comprehensive study of Canada’s retirement income system led by Dr. Jack Mintz in 2009. This extensive probe that drew on publicly-available and government data finds that “overall, the Canadian retirement income system is performing well, providing Canadians with an adequate standard of living upon retirement.” It suggested that there may be a small minority of Canadians who were ill-prepared for retirement but refuted suggestions that a systemic overhaul was required. It continues to be the foundational study on the state of Canada’s retirement income system even though some of the data are now 10 years old. An updated analysis would ensure that future policy discussions are relying upon current data rather than extrapolations. A second step would to be follow through on the government’s commitment to expand the GIS for a subset of single low-income seniors. There appears to be an empirical basis for this type of targeted top-up. Analysis from Philip Bazel and Jack Mintz finds that roughly 11.5 per cent of all elderly individuals, especially those who have never married or have lost a spouse through death, live in households with incomes below $20,000. Directing public resources to this cohort would represent the sort of targeted, incremental policies needed to improve Canada’s retirement income system along the lines envisioned by the minister. The third option would be to reform the PRPP model. The legislation enacted by the previous government was overly cautious and could be strengthened. PRPPs are large-scale, low-cost pension plans that can pool resources from multiple members and are managed by third parties such as financial institutions or insurance companies. The purpose is to provide a low-cost option for employer-provided pension plans that can be easily adopted by small- and medium-sized businesses that do not have the capacity to offer their employees more sophisticated plans. PRPPs were conceived with the percentage of Canadians without employer-provided pension plans in mind and, in this sense, represents a targeted, scalpel-like reform to the system to address this specific group. The federal legislation enabling PRPPs has since been replicated in several provinces, including in Quebec, which has experimented with different criteria and requirements. Federal legislation for PRPPs could be improved. It neither requires employers without other pension plans to offer PRPPs to their employees nor does it contemplate mandatory employer contributions for those who do. Quebec’s legislation, by contrast, requires employers with five or more employees that do not already offer a group retirement savings plans to enrol their employees in a PRPP (though the employees have the option to opt-out). This model is specifically designed to target the “un-pensioned”—a group of people named by one Canadian economist for being in the labour market but not having an employer-provided pension plan—rather than applying to everyone. The new government in Ottawa should consider amending the federal PRPP rules to adopt the Quebec model and may even go further to mandate employer contributions. At a minimum, moving to an automatic enrollment regime with an opt-out would be a nudge in the direction of greater retirement savings for the un-pensioned cohort. None of these steps represents a full-scale reform of Canada’s retirement income system because the evidence suggests that a scalpel rather than a sledgehammer would ensure that Canadians continue to have the support that they need for a secure retirement. Conclusion The adequacy of Canada’s retirement income security has been the subject of considerable policy debate and analysis for several years. Ensuring that Canadians have adequate resources for their retirement is a key public policy question. The new government is right to examine these issues closely. The recent meeting of federal and provincial finance ministers failed to reach a consensus on whether there is indeed a problem and what, if any, policy solutions are required. Finance Minister Morneau has committed to studying options with his provincial and territorial counterparts. A follow-up meeting is tentatively scheduled for midway through 2016 to further discuss a CPP expansion. The preoccupation with an expanded CPP is based on the viewpoint that Canadians are not adequately saving for retirement and that state-mandated savings are the only solution to this problem. Both assumptions lack solid evidence and are largely the result of definitional and measurement problems. The reality is that concerns about a so-called retirement income “crisis” are overblown and a CPP expansion would be a blunt solution to a narrow and largely subjective issue. An evidence-based policy would be neutral with respect to the composition between state-funded or administered retirement income and voluntary or personal savings, and adopt a comprehensive view of the resources available to Canadians in retirement. The ultimate goal should be to ensure that overall the system is helping most Canadians prepare for their retirement and not concerned with shifting a greater share to the state to meet an arbitrary target. To the extent that there is room for incremental action, the government ought to consider targeted policies such as increasing the GIS for single seniors and expanding the PRPP model to help those Canadians without an employer-provided pension plan. These ideas would represent a step in the right direction for greater retirement income security for Canadians.

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Concerns about a so-called retirement income ‘crisis’ overblown

A CPP expansion would be a blunt solution to a narrow and largely subjective issue, say Philip Cross and Sean Speer.

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