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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.