The Prime Minister surprised Canadians, including his own caucus, when he proclaimed from the high perch of Davos that Canadians’ pension system was about to change. After first denying what he had said in Davos, it became clearer that the next budget will include a plan to change the age at which Canadians qualify for CPP to 67. None of this, not Old Age Security, Guaranteed Income Supplement or the Canada Pension Plan were mooted as a target for new policies in the election. If mentioned at all, it was only to assure Canadians that pensions were secure.
The general narrative put forth now sounds plausible. The demographic shape of Canadian society is changing. More of us will be older as those born in the post war baby boom, roughly from 1947-1957, enter our senior years. (I can say “our” as a 1954 vintage boomer myself). The story is that all of us will be old and far too few young people will be around to work to generate the wealth to cover our pensions. It sounds plausible until examined. No one is anticipating that the GDP will collapse with fewer workers. We assume the GDP grows because we anticipate the economy will be buoyed by immigration and by less labour intensive economic activity.
Moreover, the Parliamentary Budget Office report (issued Feb. 8) states that, having off-loaded two per cent of health-care costs on the provinces, Ottawa has room to absorb the bump created by retiring baby boomers. In fact, the PBO report says we can increase Old Age Security. Debates about pension reform have pitted the Harper Conservatives who refuse to enhance CPP, against many premiers and opposition parties. Pension reforms must be built upon the system that will best create decent pensions that will keep the elderly out of poverty, require minimum additional contributions and have low administrative and investment costs.
The only system that is capable of meeting these goals is the CPP, a proven system that is the envy of many countries. Its systems can be modified to offer enhanced benefits. Everyone is familiar with the CPP, which is in sound financial health with the latest actuarial report noting that it is sound for at least the next 70 years.
Approximately 35 per cent of older citizens 1.6 million seniors are still dependent upon Guaranteed Income Supplement (GIS) to keep them out of poverty. This is partly because current the CPP objective of just replacing 25 per cent of the average industrial wage is too low. A 50 per cent income replacement ratio would dramatically reduce the reliance on GIS to keep the elderly out of poverty and reduce the cost of GIS to the federal government by billions annually.
The Year’s Maximum Pensionable Earnings (YMPE) should be raised to at least $90,000 and consideration given to raising it to the full Income Tax Act (ITA) limit for Registered Pension Plans (RPP) of ($122,222 in 2009) pending an evaluation/review in a decade.
Subject to an actuarial evaluation, it is expected that these benefits could be achieved with a phased-in increase of CPP contribution rates from the current 9.9 per cent to approximately 14.5 per cent, most, if not all, of which would be offset by reductions in workplace pensions for those with workplace pensions. Redirected GIS savings could be used to offset some of the required contribution increase.
An honest evaluation of the effectiveness of current tax policy will illustrate how inefficient it is for most retirement savings. Net federal RPPs tax expenditures (concessions) were worth $17.6-billion and $11.3-billion in 2007 and 2009. RRSPs cost $12.1-billion and $8.5-billion in the same years. The loss of provincial revenues adds another 35 per cent to 40 per cent.
Defined benefit (DB) plans are much more efficient than defined contribution (DC) plans in that they produce significantly higher pensions for the same contributions, yet DC plans get the same tax support.
RRSPs are terribly tax inefficient in that for the $8.5-billion to $12.1-billion in annual net tax expenditures (around 30 per cent of total contributions), the median value of RRSP assets by Canadians under age 65 is a woeful $40,000 and those over 65 have less than $55,000insufficient to supplement one’s pension, especially at today’s annuity rates. Only 25 per cent of working Canadians contribute to RRSPs, only six per cent with incomes under $20,000. Pro-rating tax expenditures to the value of projected pension would bring fairness and equity back into the system.
Phasing-in the doubling the target income replacement rate to 50 per cent and the doubling the YMPE over the next 47 years is the most efficient way to ensure that future retirees will be able to retire with dignity without inter-generational subsidies.
It’s time to have an open discussion about the fiscal, health, and social implications of the aging population. Let’s start by looking at the evidence before jumping to conclusions.
Green Party Leader Elizabeth May also represents Saanich-Gulf Islands, B.C.