Pension shakeup needed for CPP

December 18, 2012
By

Bill Tufts, Special to Financial Post | Dec 17

Adjustments to CPP a diversion from the real problem

Some politicians and unions in Canada are on an ideological mission to increase the Canada Pension Plan without understanding the key drivers and policy implications behind the move. Business is solidly against the move, seeing it as another payroll tax that our struggling economy can’t support.

Some key facts must be understood. An enhancement of the CPP will be a significant drain on investment capital, at a time when the public sector unions, and even the Bank of Canada, are calling for business to come off the sidelines and kick start our economy. Expanding the CPP now will have the opposite effect.

Increases in CPP will be a redirection of money from the private sector that creates capital investment. The CPP investment fund invests in mature companies and government bonds, not the innovative small business sector that is the driver of our economy.

It is important to examine how much capital is hoarded by the CPP.

Last year working Canadian families and businesses each contributed 50% of the $ 37-billion in contributions that went into the plan. In addition, the plan earned another $15.5-billion in investment income. This contrasts with the $30-billion that was contributed into the public sector pensions last year and $33-billion into RRSP’s.

The former head of the CPP stated that the plan would accumulate over $275-billion by the year 2020. If a plan was implemented to double the CPP as some proponents suggest, the plan would need to accumulate a total of $550-billion by 2020. The total unfunded liability of the CPP program documented in the last actuarial report in 2009 was $748-billion. Now public-sector unions want to double that amount! This new deficit would be in addition to the health-care unfunded liability and the other pension shortfalls that exist in the country today.

This pool of capital going into the CPP diverts money from the small companies and corporations that fuel the economic engine.

The contributions in the CPP are based on the wages of Canadians. Contributions are already set at 9.95% of salary and are paid for by matching contributions from workers and their employers. Doubling these contributions in this very fragile economy could have catastrophic and unintended consequences.Advertisement

The CPP is already part of a very effective retirement security program that includes the Old Age Security (OAS) program as well as the Guaranteed Income Supplement (GIS). Increasing the CPP would merely be a diversion from one of these programs. It would not enhance our national programs and, in fact, would lock Canadians into contributions of almost 20% of payroll.

Proponents for the Big CPP suggest that it could wipe out all of the shortfalls in savings for Canadians. It is true that increases in CPP contributions would help the public-sector pension plans that are integrated with the CPP, but for most Canadians the benefits would be minor. It would mean that Canadians would have to pay a higher amount of payroll taxes to fund the plan, which diverts even more money from their own RRSPs. Currently, the average Canadian, by the time they reach age 65, can only manage to save $60,000 for retirement.

The provinces promoting a “modest enhancement” of the CPP are the same ones that have fiddled while the pension system has burned. The Pooled Registered Pension Plan was discussed at the past few finance ministers’ conferences and was implemented in federal legislation this past spring. Rather than getting on with the business of creating the rules for the new plan required at the provincial level, some provinces are still tinkering with the broken defined-benefit system. Defined-benefit plans are being rapidly wound down by the private sector, yet, paradoxically, are still receiving billion-dollar bailouts in the public-sector system. Bailouts paid for by taxpayers.

One option for the CPP would be to allow for voluntary contributions from all Canadians. We can change the public-sector systems that are costing $30-billion a year for a small, protected class of public-sector retirees. Then the system might have enough money to help all Canadians just a little bit. Let the public-sector unions, the big promoters of the Big CPP, back up their ideas with commitments to help pay for those in the private sector.

Another alternative would be to eliminate the CPP pension for public-sector employees who have a retirement pension income greater than $50,000. That would add fairness to the current system. They would still have a wonderful pension without unduly taking from those in the private sector, who paid for their cushy retirement plan in the first place.

We need a comprehensive restructuring of the system, including the winding down of the special class of public-sector pensions. Adjustments to the CPP at this time are just a diversion away from the real problems, created by federal employees wanting to protect their golden rewards, and would amount to merely minor tinkering. The head of the Ontario Teachers’ Pension Plan said it best earlier this year: “As the signs came in that the assumptions were wrong [for pensions], the changes weren’t made when they could have been evolutionary. Now, the changes have to be revolutionary.”

Tinkering with the CPP is not the type of revolutionary change that is needed to save the system.

Bill Tufts is founder and executive director of Fair Pensions For All.