Exploring Ontario's Pension Proposal - Part One

September 9, 2014 - According to the Ontario Provincial government, the Federal government has failed to enhance the Canadian Pension Plan (CPP) to reflect today’s economic and demographic realities. The most recent Ontario Provincial budget proposal outlines a host of reasons for this; explanations that will be familiar to anyone who has read a story about Canadian pensions recently. Today, people are not saving enough, they are living longer and many do not have workplace pension plans.

The key point is that the maximum CPP benefit is just under $12,500 a year, though the average CPP benefit paid out in Ontario is roughly $6,800. Evidence for these explanations can be found in studies like the one conducted in 2013 by CIBC which found Canada’s household savings rate had dropped steadily from 15-20% of disposable income in the 1980’s to as little as 4% today. Further basis for this line of rationalization is found in an election priorities document generated by the Ontario Chambers of Commerce. The provincial business lobby group warns that without adequate pensions, retirees will have to rely on government supplements and they will be able to consume much less – meaning higher taxes and less economic activity. From the Chambers perspective, the long-term economic prosperity of Ontario hinges on the purchasing power of the large cohort of future retirees. The Chamber report further stipulates that the long-term fiscal health of the government is contingent on limiting the number of seniors reliant on taxpayer funded income assistance.

Arguably, the most anticipated section of the provincial platform revealed was the details of the Ontario Registered Pension Plan (ORPP).   The ORPP is a mandatory supplementary savings vehicle designed similarly to the CPP. The ORPP claims to replace 15% of income up to a maximum of $90,000 in earnings. Equal contributions would be shared by employer and employee, up to a maximum of 1.9% each or 3.8% combined. The ORPP and CPP combined aims to replace a maximum of 40% of income, up from the CPP’s current 25%.The money pool these contributions create (about $3.5 billion according to government estimates) will be invested by a board operating “at-arms-length” from government. The people who are exempt from the proposed mandatory program are: the self-employed, those already enrolled in workplace pension plans, and those in federally regulated industries, such as banking. It is interesting to note that almost two-thirds of Canadian workers have no employer-sponsored plan.

The Liberal government offers further support to these estimates by pointing to past budget documents that illustrate three case studies to highlight just how much middle income earners would gain in guaranteed benefits through the ORPP each year. These supporting facts provided are based on employees who have worked for 40 years and have retired at age 65.

• A worker who earned $45,000 over that period would collect $17,090 ($10,680 from CPP).
• A worker who earned $70,000 over that period would collect $22,430 ($12,460 from CPP).
• A worker who earned $90,000 over that period would collect $25,275 ($12,460 from CPP).

For low-income workers, the combination of CPP, Old Age Security, and the Guaranteed Income Supplement will typically allow these earners to do as well as when they are working, but the shortfall is potentially more pronounced for middle income wage earners in the $40,000 to $100,000 wage bracket.  The results could be shocking when middle income wage earners have to adjust to living on a government pension. Malcolm Hamilton of the C.D. Howe Institute argues that individuals require 50 to 60 percent of their pre-retirement income to maintain their standard of living in retirement.

According to the government, ORPP would be implemented in 2017, and be phased in over a two year period beginning with the largest employers. ORPP has the capacity to cover about half of Ontario’s six-million-person work force, and according to Jim Keohane, who heads up the $52 billion Healthcare of Ontario Pension Plan, the ORPP is a “step in the right direction” for pension reform in Canada because it is not just a voluntary savings plan, but it will provide a guaranteed benefit. Corroborating Keohanes’ sentiments, the Ontario Finance Minister has claimed “the top up pension plan will help the people who face the greatest income reduction in retirement.” The ORPP is further supported by The Workforce Safety and Insurance Board and the Ontario Pension Board, which together manage $40 billion in assets, and have also agreed to participate.

In response to the Liberal government’s outcry for pension reform, the Federal government rationalizes that it is up to Canadians to save for their own retirement through the established plans provided. This line of thinking is reinforced in the spring report conducted by the Auditor General’s office which warns that it is important for public sector pension plans to be designed and managed in a way that considers not just the present circumstances, but also protects the interests of current and future employees and taxpayers. Auditor General, Michael Ferguson, cautions that only the management of the ORPP was examined, not whether it was sustainable. The most practical solution for the Ontario government to combat scepticism and ensure the viability of the ORPP is to carry out regular and systematic assessments where continual evaluation allows for necessary changes to maintain fiscal sustainability.

Improved pension security in Ontario could effect change across the country – the majority of provinces have indicated support for increasing the CPP, and continue to battle with the problem of inadequate retirement savings in their jurisdictions. This raises another caveat to be explored; according to Susan Eng, Vice-President of the Canadian Association of Retired Persons, that is, despite it being a complementary plan for Ontarians, the better proposal is for this to happen nationally. Eng recommends that it is imperative to pass similar legislation in other provinces or create a national plan. This points to the reality that workers move from province to province and the benefits need to be portable to match employment migration trends. A CPP supplemental plan has already been in practice for 25 years in Saskatchewan. The SPP is voluntary and it is not even mandatory for beneficiaries to be from the province to enrol. The supplemental pension plan roughly serves 50% of the people in the province who have no pension plan and there are thousands of people from outside the province who also contribute.

For people familiar with retirement realities in Canada, the pension issue seems very pressing. As far as the ORPP proposal goes, the model positions itself to keep the door open to the potential of a federal government willing to implement an enhanced CPP down the road. In the continuation of this blog topic a further examination of the ORPP will delve deeper into the critiques and potential impacts for Ontarians.

Authored by Cheryl Reid, Policy Analyst with Northern Policy Institute (Thunder Bay)