Bad Idea #11 – Ontario Retirement Pension Plan
Regular readers of my commentary will know that I am absolutely against the idea of our Federal and Provincial Governments expanding the Canada Pension Plan. I call this Bad Idea #17 and have written about it a couple times (you can read those commentaries here and here) and have a third installment on the way. One reader asked where they can find the entire list of bad ideas. The truth is that I had to keep some open spots in the list because I knew more bad ideas would be forthcoming.
On May 1, 2014, Ontario’s Liberal Government presented its budget which included the Ontario Retirement Pension Plan. I don’t have all the details, not because I didn’t look, but because the government doesn’t have all the details to offer at this stage. Apparently their strategy is to tell you they are doing something and then leave some room to figure out the details later. Sadly, I wish they figured out how ill conceived this idea is in all its details before rushing the news – it will be embarrassing when they have to back track or worse when they push ahead and waste a bunch of taxpayer money (think Ontario gas plants).
I guess the Liberals thought that they had no choice but to go this route after so publicly pushing the Feds and other Provinces to get on board with a CPP expansion and playing the ‘if you don’t do it with us we will do it on our own’ card. I can’t believe that they can’t find a single soul in the Ministry of Finance that can help them understand how complicated this thing is going to be (think gun registry).
The implication is that it will be just like the CPP except:
- Employee contributions will be 1.9% of earnings up to a maximum of $90,000
- Employers will be required to make a matching 1.9% contribution
- Self-employed may not be required to join
- Workers with a ‘comparable’ workplace pension plan will not be required to join
- Not all employers will join together – rather larger employers will join first – smaller later
So – here are problems that mirror the problems that would come with an expanded CPP:
- Funding a defined benefit plan means you need to set a benefit level and guess at a contribution rate. If the contribution rate is inadequate – the next generation of workers has to over-pay to compensate for the under-contribution by the generation ahead.
- Additional savings of 3.8% will be meaningful to those retiring in thirty or forty years but will do little for those retiring in the next decade – especially when the program doesn’t even start until 2017.
- CPP/ORPP are social programs and not pension plans – there will be winners and losers in the cross-subsidization game. My fear is that the losers will continue to be the low income workers that are often in poorer health and have inconsistent earnings and the winners will be those that are well educated, well paid, and already looking forward to a healthy and long retirement.
- There is a risk – not a guarantee but a risk – that pulling these dollars from consumers and businesses might stall an already fragile economic recovery in Ontario.
But wait – before you say ‘no sir’ to this proposal, there is more – problems that are unique to Ontario’s super special go-it-alone strategy:
- There is absolutely no leverage of the CPP infrastructure to receive contributions, invest funds, or calculate and pay benefits. To be clear – the CPP spends more than $600 million in operating expenses – how much will Ontario spend to run their mini-CPP?
- The flat employee contribution rate of 1.9% of pay likely means that you are taking valuable take-home pay from minimum wage workers who may not need more retirement income nearly as much as they need more dollars to pay their ever increasing hydro bills.
- It won’t be universal – some employers and their employees will be in – some will be out – so figuring out what you get when you retire will be a little less difficult than solving the Rubik’s Cube. What is really frustrating about this feature is that level contributions in a defined benefit plan only work if employees stay in the plan for a lifetime – otherwise younger workers always subsidize older workers. I can’t wait to see who they pick for Chief Actuary or the assumptions that he or she makes to justify the wonderful benefits promised for the low, low, price of 3.8% of pay.
- Small employers, those that are least likely to already offer any sort of pension are the last to join – if they ever join at all. Maybe this compromise was intended to satisfy the Canadian Federation of Independent Business – but once again we have created the optics of helping people when we really aren’t doing anything for the people who need the help most.
I don’t know what more I can say – someone in the Ontario government is convinced that this is the way to go and either they don’t have anyone around them telling them it isn’t – or they just aren’t listening.