Politicians have the future of the Canada Pension Plan in their hands, as federal officials meet with provincial premiers in Vancouver.
If a stable, secure retirement for all Canadians is the aim, our leaders should commit to boldly expanding this bedrock national pension program. Instead, several provincial leaders – including in BC, Quebec and Saskatchewan – have signalled a desire to delay, limit or even block CPP expansion.
They should change their tune.
The growing retirement income gap in Canada should be no surprise. There’s been a huge decline in workplace pension coverage in Canada in recent decades.
In 1977, 43% of Canadians were covered by a secure, defined-benefit workplace pension. By 2012, that figure fell to 27%. The situation in the private sector is even more stark, with the level of defined-benefit coverage falling to a mere 11%.
This leaves a looming crisis on the horizon, which many – especially in my generation of pension-less and often precarious younger workers – feel viscerally.
The question is what to do about it. Fraser Institute author Philip Cross recently tried to downplay the issue in the pages of the Vancouver Sun. Cross, along with the financial sector, advocates the use of individualized retirement savings vehicles like RRSPs.
The problem is that’s precisely the status quo, and it’s not working.
In recent decades, people have been drilled with the message that they need to plan for their retirement on their own by investing in RRSPs. But as many abruptly realized in the financial crisis of 2008, private RRSPs aren’t nearly as secure as many presume.
From a public policy perspective, there’s no contest: CPP wins hands down.
First, despite being a form of “private” savings, RRSPs are hugely expensive to the public purse, with RRSP tax breaks costing more than $10 billion annually to federal treasury alone. Yet, the lower your income, the less likely you are to contribute to an RRSP, and vice versa. 57% of RRSP contributions come from Canadians who earn more than $80,000 per year. CPP, in contrast, is universal.
Second, RRSPs don’t necessarily provide an income stream through old age, since they’re essentially a savings account rather than a pension. It all depends on how long you live. RRSPs actually require you to make a high-stakes bet on your own life expectancy.
The CCPA’s Hugh Mackenzie crunched the numbers, and found that to manage this “longevity risk” of outliving your savings, you’d have to contribute 2.5 times as much money to an RRSP as you would to a defined-benefit pension plan like CPP, in order to ensure the same level of income in your senior years.
The CPP is also fully portable across the economy. In an era of contract work and multiple jobs and career changes, a pension plan that travels with you to any job is increasingly vital.
But it’s on efficiency that the CPP really mops the floor with the competition. The Canadian financial industry charges among the largest investment management fees in the world through individualized savings vehicles like RRSPs.
In practice this means a huge portion of your RRSP contributions actually flow into the pockets of the financial industry, rather than into your retirement income stream. Incredibly, over a working lifetime, fees can easily soak up more than a third of your RRSP retirement savings.
You’d have to work until you’re 72 simply to gain the same income stream you’d have by 65 if you saved via a pension plan.
Recognizing these facts, the finance and insurance industry strongly opposed the Canada Pension Plan at its creation in 1966. In the months ahead, they’re likely to vigorously lobby politicians against a CPP expansion once again.
We have a world-class, highly-efficient public pension system in the CPP. It’s simply too small today.
Ultimately, this comes down to a political choice. Will our politicians build on one of the most successful national programs in Canada’s history, or will they instead hew to the pressures of big finance?
Alex Hemingway is a public finance policy analyst with CCPA-BC. Follow him on Twitter @1alexhemingway.