October 25th 2009
FEW THINGS in life are harder to change than the Canadian Constitution.
One of them, unfortunately, is the Canada Pension Plan, the $108-billion fund that guarantees 17 million Canadians a pension of up to $10,905 annually.
Another, also unfortunately, is getting us to save more for retirement without a mandatory contribution fund like CPP.
CPP is an important but far from adequate source of retirement income, particularly for the 75 per cent of workers in the private sector who have no company plan. Yet making it a more effective vehicle for savings would take a lot of political agreement. Parliament would have to approve any changes. So would at least two-thirds of the provinces with two-thirds of the country’s population.
Getting this level of political consensus is one hurdle standing in the way of a bold proposal by the Canadian Association of Retired Persons to create a second tier of the CPP.
CARP believes an expanded CPP (allowing contributions on earnings above the current cap of $46,000) is the best way to give more Canadians the security of a very large, professionally managed, low-expense pension fund — something 85 per cent of government-employed workers already have in their taxpayer-backed defined-benefit plans.
But as the association released its CPP plan in Halifax last week, vice-president Susan Eng told our editorial board that CARP also expects “push-back” from industries that sell financial advice and pension services, and from companies and individuals opposed to a new mandatory-contributions scheme.
So while CARP thinks a second tier of the existing CPP model is the best way to produce predictable and adequate pensions, Ms. Eng says it’s open to alternative models — whether voluntary for employees and/or employers, or based on defined contributions rather than defined benefits — if they can achieve the same goals.
Effectively, CARP is challenging governments, pension experts and critics to come up with a better idea.
CARP couldn’t ask for a more receptive national audience. Canadians are concerned as never before about retirement because of the recession’s double hit to their plans. Volatile markets have damaged their RRSP savings and left their employers struggling to make deficiency payments in their company-sponsored plans — if they’re fortunate enough to have RRSPs or company plans. Most Canadians don’t. And some private-sector workers who thought they had secure defined benefits are finding otherwise if their company is pushed into financial restructuring or bankruptcy, where outstanding pension deficiency payments are not a secured claim on the company’s assets — something that CARP, rightly, also wants changed.
CARP’s most powerful case for building on CPP is the efficiency of a mega-fund. “Just by virtue of its size, its professional management, its expense ratios, which are magnitudes smaller than what you have to pay yourself, the enforced savings aspect, the spreading of the risk, the robustness of the size of the plan, that alone would give you a better result than exists right now as an option for you,” Ms. Eng argues. As CARP’s plan points out, CPP’s administration expense is just 0.14 per cent of assets, compared with fees of 2.5 to three per cent that individual savers can pay. Over time, this can mean a huge difference in the pensions received.