Pension Series – Part IV – A Modest Proposal

Well yesterday I pointed out some flaws in upgrading the CPP system to a Universal Pension Plan.  That’s not to say I think we should do nothing.  Since doing nothing will have some issues like:

  1. OAS – Payments come out of general revenue from the government, if we don’t fix pensions we could end up having a lot of people relying heavily on this meaning making any reduction in payments could be a very long and hard uphill battle as the tax base sinks after the baby boomers retire.
  2. Government Defined Benefit Plans – These will become much more of a burden on the tax base if we don’t deal with plans sooner than later.
  3. People Shouldn’t be Left Behind.  Granted there is case for offering retirees a minimum standard of living since we don’t want be heartless about things and second there is a basic economic idea behind this.  Poor people tend to use more government services that those that are better off.  If we do nothing we still pay in the end, so let’s be proactive and nice all at once.

So here’s the outline of my modest proposal.

  1. Make the Default Option on all Retirement Savings Plans an Opt In.  The idea here is simple, people  are lazy, so let’s make saving easy for them.  Also people don’t tend to notice they are saving if it comes off their cheque.  So if you really don’t want to save in the plan you need to file paper work to that effect.
  2. Raise the YMPE by $20,000 for CPP.  This would only be a one time adjustment to boost inflows to the CPP plan and raise the maximum payout by about $4700 per year (FYI: current YMPE is $46,300 and max pension is $10,905/year).  The brilliant thing about this adjustment is it won’t significantly alter benefits to boomers since CPP benefits are calculated with the average of your earnings during your working life.  So a raise of contributions by the boomers just a few years prior to their retirement will only very slightly increase their payouts.  This will also allow existing retirees to keep more pension money if their spouse dies and they take over their spouses CPP payout.  This is a good idea since right now if a spouse dies and you are both at the maximum CPP payout it can drop the surviving spouse into near poverty conditions  if they have no additional savings since they also lose their spouses OAS.  Also raising the YMPE won’t effect those in lower income jobs by taking any more money from them and will allow younger people who pay in for longer to get more of the benefit over their working life.  Total additional cost per person per month is $82.50 assuming you make up the maximum YMPE.  So it’s a modest impact even for those that are going to retire early.
  3. Close off all Defined Benefit Government Run Plans.  Then switch all new workers over to a defined contribution.  We collectively can’t afford the unlimited liability from these defined benefit plans going forward.

So that’s my modest fix for pensions and retirement savings in Canada.  Now obviously I likely haven’t thought of every angle on this yet, so I want to hear your ideas on this proposal.  Is it good, bad, or do you have a better idea?  Please share your ideas with a comment.

6 thoughts on “Pension Series – Part IV – A Modest Proposal”

  1. It’s an interesting proposal.

    I’d add that if the CPPIB is really as smart as they say, they should be able to manage the funds effectively, so that there is no unlimited liability in the CPP. All CPP pensions are fully funded, using actuarial assumptions (for better or worse).

    If you switch government employees from DB to DC, your simply shifting the market risk from taxpayers to the employees. However, CPPIB says they have that covered.

    I’m intrigued by the idea of adding an optional component to CPP. You have no choice but to fund (with your employer) up to YMPE. After that, you and/or your employer could contribute more and benefit from the expertise of CPPIB. The government should definitely use CPPIB to manage their pension funds.

    Further, I would like to see OAS, GIB and other income programs for seniors rolled into CPP. For example, you have to do nothing but live in Canada for 40 years to receive OAS and a CPP minimum benefit could replace OAS, funded by the government. This would be more sustainable, but there would still be errors in projecting the number of seniors in the future and the number who have low income. Still, it would be an improvement over pay-as-you-go.

    Benefits would include: no bankruptcy risk, affordable management due to economies of scale, administration is already in place for withholdings, simple to opt-in.

    Drawbacks include: CPPIB isn’t infallible, as we saw last year, putting that much money in people’s control isn’t ever a good idea, government bureaucracy could complicate the administration, politics could affect the fund.

  2. Switch all government pensions from DB to DC? You call this a “modest” proposal?

    You’d have to shut the country down for a year or so to make that happen.

  3. FP – Actually I said all “new workers” over to DC. So you could do the change on a reasonable basis. I’m not crazy enough to suggest we change every civil servant’s pension in one year. YIKES!

    Robert – An interesting idea to roll things over into CPP. Also a bit dangerous as you pointed out. The politically advantage as being separate funds right now keeps people for trying to change too much at once. Also over loading the CCPIB might not be a good idea. Excessive amounts of cash are hard to find good investments for, especially if you increase it to those levels. Also there is the issue that OAS comes out of current funds, while CPP is trying to bank up before expanding (see comments on yesterday’s post for details). The two don’t mix well.

    Thanks for the feedback,

  4. Sorry Tim, I missed the “new” in that statement which is pretty important.

    I still think it would take a long strike to get that change but it’s doable.


  5. Interestingly, this was in the news today:

    What it could lead to, should the CPP get large enough, is defacto nationalisation. If the CPP has too much money, sinking $100 million into a company may represent less than 1% of funds, a level too small to be meaningful in producing returns. At that point, the CPP will either end up buying controlling stakes in companies (nationalising them), or be forced to buy only bonds and real assets, including real estate, infrastructure, timberland, resource royalties, etc.

    I’m not sure that’s the direction we want our government to take.

  6. Robert,

    It might not be so bad. It’s voluntary and so some people won’t bother with it and it focuses on those with no pension/RRSP which I would bet is mostly those under the average income.

    Hence it likely won’t be huge amounts of cash to add to the pile. Also the CPP would likely expand investments more outside of Canada. After all we are such a small part of the world markets. So nationalization is likely not a huge problem.

    My thoughts,

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