Expanded CPP – What problem are we trying to solve?
I spoke Tuesday at the International Society of Certified Employee Benefit Specialists’ Annual Symposium. My topic was the expanded CPP and what it means for employees, employers and taxpayers. The presentation was fairly basic and went through the details of what we know today (future benefits) and what we still don’t know (future contributions, T4 reporting).
I advised attendees to start to develop an action plan and decide what changes if any they need to make to existing retirement programs and other compensation, to integrate the changes, and reminded everyone that the key to navigating this transition is to communicate, communicate, communicate.
At the end of the presentation, we went to the Q&A and that is when things got interesting. One attendee pointed out that my presentation didn’t address why the government went down this road or why it was a good thing that they did. His assertion was that there was a gap in retirement income sources for Canadians and this gap was growing as more private sector employers exit defined benefit plans. He also asserted that having the government step in to solve the problem was ideal because no one else could do it – he pointed to the track record of private employers in the past twenty years as evidence.
My response: I agree that there is a gap in the expected retirement income that some future retirees can expect relative to the retirement income enjoyed by their parent’s generation. I don’t think anyone disagrees with this conclusion and in fact just yesterday the C.D. Howe Institute released a paper by Bob Baldwin that sets out the consistent findings of a number of different papers. Mr. Baldwin’s conclusion:
“Five different studies give very different impressions of the extent to which the future elderly are likely to experience a decline in their standard of living during retirement. But they share a common conclusion: this is a largely a problem for middle- and upper-middle income earners.”
But this is where the attendee and I part company. I pointed out that it was really a political or philosophical question of who should solve the problem. I declared myself a capitalist and said that I personally thought that the government was the wrong entity to solve the problem for us. My main fear is that when the actuarial magic is done, my children and yet to be born grandchildren will be paying an unfair share of the cost of letting my generation retire with an increased retirement income for which we didn’t make the necessary sacrifices to pay for during our working lifetimes. I pointed out in my session that this is exactly what happened when we started the CPP and my father retired with a full pension after about 15 years participation and as a result those of us working today pay 10% for CPP instead of the 6% that it should really cost. Let’s not make the same mistake twice.
A second attendee supported the idea of having the government take this role. He pointed out that it takes a combined family income of $170,000 annually to pay for the average house in Toronto. I didn’t question his statistic and I wouldn’t be surprised if it was right. His main point is that there is no money left at the end of the day to save for retirement.
I have four observations:
First, where are we getting this continuous inflow of families making $170k+? Certainly this must be an ‘above average’ income just to pay for the ‘average’ house. I am not a brilliant economist but I think it is pretty plain to see that the income-home price equation is out of equilibrium. Perhaps home prices will increase in Toronto indefinitely because of foreign investors – but let’s be honest that the average family is living in a home that they can’t afford and if housing prices start going down instead of up, it is going to get ugly.
Second, these helpless Toronto homeowners don’t represent the country – sure they are a big population, but less than 10% of the country nonetheless. Expanding a national program like CPP just to help out a minority of our population doesn’t sound like a good strategy to me.
Third, because the expanded portion of the CPP has to be ‘fully funded’, there is no magic here. No one is going to suddenly get retirement income that they didn’t pay for through payroll deductions and employer contributions (unless people are willing to admit that they will get more than they pay for by stealing from the kids). So if you can just make ends meet with your current rate of pay, good luck when you give up 1% in 2019 plus your employer is pressured to reduce your ‘total rewards’ by another 1% to cover their portion of the new CPP tier. And all the best when the extra 4% employee and 4% employer contributions kick in starting in 2024.
Fourth, who are we trying to help? The first phase of the expanded CPP is focused on earners at or below the YMPE ($54,900 in 2016). This isn’t the group that Mr. Baldwin thinks has the problem in the first place. If you really want to help those middle income earners – we should have moved the earnings threshold much higher and kept the benefit below the YMPE as it was. We are directing dollars and attention to the wrong group and doing only a modest amount for the group in need.
I make my living helping sponsors of DB plans manage their programs. It would be great for me if DB plans were more popular with private sector employers. But I think it would be intellectually dishonest to pretend that running a DB plan is easy. I think it is also unfortunate that some commenters want to assert the view that DC plans don’t work. When you compare a 3%/3% DC plan to a 10%/10% DB plan it is no wonder that the benefits are not comparable. The problem isn’t the savings vehicle, the problem is the rate of contribution on the way in.
Instead of having Canadians step up and take responsibility for their spending and their savings, our government is saying that they will take responsibility by pooling lots of people and lots of dollars and spinning it around in a drum. It will be uncertain to everyone who will under-pay and who will over-pay for what they get out of the drum. If this is the level of socialism that Canadians want for themselves, then the voters have spoken and government has responded. For me, I prefer individual accountability.