Some might ask why a potential Alberta Liberal Party leadership candidate would talk about the Canada Pension Plan. Isn’t it a Federal program with Federal rules? Well, the truth is that the Constitution defines it as a provincial sphere of power. A long time ago, the provinces invited the federal government into their sphere of power. So today, for the most part, it is administered jointly. It is true that Quebec manages and administers its own program – the QPP – however, since that same program is fully exchangeable with the CPP, one could say all ten provinces work together in this one area.
Consequently, the Government of Alberta, through the Premier, works with the Federal Government and the 9 other provincial governments to make sure that the Canada Pension Plan operates well and in the best interest of all of us. We do so on a consensual basis; therefore, it is important for me to talk about it.
When the Canada Pension Plan came into being, a few assumptions were made, consciously or not. One assumption would be that as Canadians retired, they would own their own homes. Given that Canadians owned their own home, for the most part, retired Canadians would be debt free. Consequently, the amount of money needed in retirement would be small. One would need enough money to buy groceries, pay for small maintenance and utilities. Furthermore, people didn’t live long after retirement. Famously, most people lived no more 5 to 10 years after their retirement (or turning 65) in 1966. Coupled with private sector pensions, savings and some investments, the thinking was simple: most Canadians would be okay with a small stipend.
However, in 2016, we will have to ask more of the Canada Pension Plan and there are many reasons for this. For more than a decade, we have heard the same reasons. Most Canadians don’t max out their RRSP contributions, nor do they have access to a private sector pension plans. Most Canadians don’t have an emergency fund that has the equivalent of three to six months of savings in it; at the same time, we have larger debt burdens and live pay cheque to pay cheque.
Over the last number of years, many federal and provincial governments of all stripes have tried to tackle the problem. Many Governments since the 1990s have introduced targeted tax credits. The Harper Conservatives introduced TFSAs and Pooled Pension Plan options. However, all indications have been the same: Canadians don’t save enough.
How do we know this? We have heard thesis repeatedly from various Think Tanks, Universities and Financial Firms as far back as the 1980s. Most recently in the Globe and Mail, Journalist Shawn McCarthy noted that “A large percentage of older, working Canadians are heading into retirement without adequate savings to keep them out of poverty.” A study, authored by the Broadbent Institute, noted that half of Canadian couples “between 55 and 64 have no employer pension between them, and of those, less than 20 per cent of middle-income families have saved enough to adequately supplement government benefits and the Canada/Quebec Pension Plan.” (Many Canadians entering retirement with inadequate savings, study says, by Shawn McCarthy, The Globe and Mail, Feb. 16, 2016) This was just another in a long line of research that have noted a similar trend: Canadians need to do more.
So what do we do? About two weeks ago, before the tentative deal worked out between the Feds and a number of provinces, I noted on Twitter that a part of the solution was having a “robust” Canada Pension Plan. Someone asked me how and so I am documenting my ideas here. Robust, in my tweet, had two meanings. The first meaning came from the need to have more Canadians saving more money. For years, we have seen studies that have said that many of us aren’t saving enough.
With savings rates at historic lows, it has become clear that we need insure the mandate contribution to ensure success. If one doubts this is a good idea, I would note that it has been done before. From 1966 to 1986, the contribution rate was 3.6%. Or put differently, employees and their employers paid in 1.8% of an employee’s income, while a self-employed person paid in 3.6%. However, under the Chretien years, that was changed. Now, employees and their employers each pay 4.95% of a person’s income, while self-employed persons pay both sides (i.e. 9.9%). That change allowed for the CPP to be more solvent and allowed it to move to a market based system. Now the CPP Investment Board reports, after fees and costs, a 5 year return of 10.6% per year and a 10 year return of 6.8% per year. In its Annual Report, it notes that the “CPP Fund ranks among the world’s 10 largest retirement funds” and along with its head office in Toronto, the CPP now has offices in “Hong Kong, London, New York, São Paulo, Luxembourg and Mumbai”. The CPP Investment Board is ahead of its own benchmarks and, consequently, one of the best ways, in either the public or private sector, to secure Canadians’ futures.
Increasing the mandate, at that point, didn’t cause a recession or any poor economic outcomes. Given the success of moving toward the CPPIB model, it could be suggested that allowing/demanding Canadians investment more into the CPP might be a strong way to guarantee their futures. If you want proof of the strength of this public sector model, compare it to some private sector funds that are used in RRSPs. Olev Edur’s “Special to the Financial Post” provides that proof. Written on February 10, 2014, Olev noted that while, “2013 was a banner year for most equity funds but over 15 years all but Canadian equities and a few other small categories had pretty dismal results”. For example, U.S. equity funds, “averaged a sizzling 36.7% return in 2013 but an anemic 1.8% annual compound return for the 15-year period through December 2013; international equities returned 27.6% and 1.5% respectively; European equities, 30.9% versus 1.0%”. (15-year mutual fund review: Canada was one of the few bright spots, National Post/Financial Post)
The irony of that piece was that the sectors which seemed to be doing best, at that time, are now the sectors which are doing worst. As an example, Canadian Commodities Investments were preforming well up until the last 18 months. When compared with the strong 5 and 10 year returns of the CPP Investment Board, one must say that the CPP is a stellar option.
Accordingly, if employers maintained their contribution of 4.95% of an employees’ income; employees could contribute a little more. Instead of the 4.95% that employees now contribute, they could be asked to contribute 6 or 7%. This 1.05 – 2.05% increase might seem like a small amount; but as we have seen, over time it can make a world of difference. This small increase could provide Canadians with the retirement resources they need.
Furthermore, there is already support for such an approach. Ontario and a number of Maritime Provinces have already been trying to make the case that increases in the CPP would benefit all Canadians. Such an approach would be cheapest possible options because CPP and other larger pension funds have lower investment fees than retail funds and their rate of return has been higher than most, if not all, other investment options.
However, this is not the only low cost option that we have. Canadians could consider doing what most other Western Countries have done: slowly pushing back the age of retirement. Given we are all living longer, most Western Countries have recognized that it makes sense to have people work a bit longer. For those who are between the ages of 55 and 60, we might consider a retirement age of 65.5. For those who are between the ages of 50 and 55, we might consider a retirement age of 66. For those between the ages of 45 and 50, we might consider the age of 67 or 68 for official retirement. While for those between 40 and 45, we might consider the age of 69 or 70 for retirement. This slow push would mean nothing to most of us, but it would allow our savings to increase and therefore allow the CPP to have the maximum amount of funds for those who are entering retirement.
With that being said, we could also consider shortening or eliminating the early retire privilege. As you may or may not know, one can receive their CPP payments as early as age 60. However, if one does do that one takes up to a 30% penalty. The funny thing is that most financial planners recommend that you take the penalty because most calculations show that it is in an individual client’s best interest. With financial planners urging their clients to take retirement as early as possible, one can see that what might have been an attempt at providing choice really turns into an early exit for most. Or put differently, if your financial planner is telling you to take the money and run, are you not going to listen? Such an exit is likely costing more than originally intended. Accordingly, I say let us shorten or eliminate that option. If we have it, let us make it a two year option. That type of change needs to be advocated for not for the stability of the fund but to ensure that the payments are sufficient to guarantee Canadians’ retirement.
Each one of these changes, either alone or in concert, could radically improve the CPP and the level of outcome it can and will provide. From my piece, I hope to show that we need to do something. We can either pay for increased benefits or radically reduce the program. Since I spent a lifetime speaking about finance, investments and public policy, my preference is a realistic restructuring: paying a bit more and slowly pushing back the retirement age to ensure that all Canadians have a substantially better CPP. By Better, I am proposing a CPP income which is sustainable, guaranteed and livable. While, that was not the intent of the program in 1966 or 1997, it should be the aim today.