June will be a critical month for public pensions with the finance ministers meeting to discuss expansion of the Canada Pension Plan. The battle lines have been drawn and a bigger CPP is either one of the biggest mistakes the country can make or a godsend that will rescue the middle class from a bleak existence in retirement.
To gain some perspective on which of these competing visions is more plausible, it is useful to look back at the birth of the CPP in the mid-1960s.
Judy LaMarsh, the Liberal minister in charge of ushering in the CPP, offered us the following observation in 1964: “It (CPP) is not intended to provide all the retirement income which many Canadians wish to have. This is a matter of individual choice and, in the government's view, should properly be left to personal savings and private pension plans.”
LaMarsh's statement echoed Liberal MP James Sinclair's sentiments, declared in the House of Commons in 1957, that public pensions were never meant to provide more than a “subsistence level” of support. We all say things we live to regret so we need to cut the Liberals a little slack, but these quotes are significant for two reasons.
First, they show that the perceived role of public pensions has clearly changed over the past half century, but you would be hard pressed to find out when that change took place or why.
Second, politicians have become more circumspect in articulating what the role of public pensions is. In the next few weeks, we will hear various proposals for how CPP should be changed, but not much detail on what that change is supposed to accomplish.
Whatever the reason might be to expand the CPP, it is not to eliminate poverty. The poverty rate among seniors is now as close to zero as we can get. Yes, a little over five per cent of seniors today still have income below the poverty line (defined as the after-tax low-income cut-off), but most of these are either recent immigrants, who are not eligible for a full Old Age Security pension, or they are retirees who simply haven't applied for their Guaranteed Income Supplement.
Another reason you will hear in favour of expansion is that people are saving less than they used to. A C.D. Howe commentary published in 2015 shows that this perception stems from a misunderstanding of the often-quoted Household Saving Rate. The HSR does not measure how much workers are saving — even though it sounds like it should. The HSR excludes items like CPP contributions, which most people think of as pure retirement saving, and deducts income that retirees get from their RRIFs and annuities. As the commentary pointed out, the true savings rate has climbed from 7.7 per cent of pay in 1990 to 14.1 per cent today.
One fact you will probably not hear is that 55 per cent of recent retirees have disposable income in retirement than they had while they were working. This finding comes from a government-run micro-simulation model called LifePaths. Interestingly, the federal government pulled the plug on funding LifePaths about a year ago.
This is not to say that a CPP expansion might not make sense. I am actually in favour of it, if it is done right. One thing it will certainly do is to raise the under-savers (and yes, there are many of them) closer to the standard of living they enjoyed while working. The unanswered question is how much closer should they be without having to save on their own As it is, the bottom 20 per cent of workers by income level do not need to save at all for retirement at 65. With an expansion of the CPP, it is likely that the next 20 per cent tranche of workers can also stop saving. Is this what we want And, where do we draw the line
Another reason to expand CPP is that our economic future looks a lot bleaker than the immediate past. As much as most of us are currently saving, it probably is not enough to compensate for the lower investment returns and longer life spans that are ahead of us. Of course, expanding the CPP does not solve the problem as much as it transfers the problem from individuals to government; and that may be a good thing.
A bigger CPP addresses various other real issues such as inefficient savings due to high retail investment fees and the risk of outliving one's money. It also simplifies our retirement planning.
The most compelling reason to expand, however, is the success of the current program. There were many naysayers just before the CPP was launched in 1966. Politicians, consultants and businesses said that Canadian workers did not want a compulsory state plan, that the program was actuarially unsound and that businesses could not afford it.
All of these objections sounded quite plausible back then and yet, the CPP has succeeded better than anyone could have expected. Over time, it has become as much a part of the Canadian fabric as hockey, poutine and maple syrup. Even the people who are most opposed to expansion would grudgingly concede that the original CPP was a good idea. This bodes well for a modest and targeted expansion of the program.