This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
I like to joke that I don’t understand why no one checks with me before developing public policy. In reality, if I want my ideas to become a part of the conversation, I need to publicly join the discussion. I understand that it’s easy to criticize the government’s policy, but creating public policy is complex. The needs of all citizens should be accounted for, and it needs to be presented in a way that is politically palatable. Let’s look at the philosophy and values behind retirement and pension reform.
Where does our feeling that we are entitled to retire come from? A couple hundred years ago, entire families would do hard manual labour, such as on a farm or in coal mines and life expectancy was around 35 years old. If children survived to adulthood, they could expect to live to age 65 on average. In a predominantly agrarian or industrial society, workers were considered unable to contribute if they survived to age 65. A pension would retire them from the factory floor and pay them as long as they survived, probably at most 5 years. Today, with advances in public health, life expectancy from birth is around 67, although adults can expect to live well into their 80s. Further, our economy has shifted from agrarian and industrial to knowledge-based. The physical demands on knowledge workers are not comparable, besides which their expertise increases with age.
There is no real physical need for most people to retire. In an agrarian society, most children begin working quite young. Retirement is unlikely in such a society, so let’s suppose that over 65 years of life, 57 of those are spent working for a ratio of 88%. Today, public and higher education account for the first 22 years, with children seldom working during this time. Assuming a person works to age 65, then retires for a further 20 years, the ratio of working years becomes just 53%. Because people are able to be productive longer, due to work that is less physically taxing, and because people are living longer, retirement must not be mandatory. I think this is already the case, in most of the country.
We want to retire, but this is a preference, not a need. Who should provide this retirement? In the past, employers have provided it, in order to remove physically unable workers. Today, workers are living longer and pensions are underfunded. Retirement savings should be a personal decision. But employers are ideally situated to withhold savings from paycheques. The government has taken advantage of this in instituting CPP. Why is the government involved? Elderly citizens, some of whom are unable to work or who have no experience working, should not be allowed to live in poverty. Having a minimal pension scheme provides assistance to these valuable members of our society.
When a public pension system was originally envisioned, Old Age Security was instituted as a temporary measure until CPP began functioning. As with many government programs, the political will didn’t exist to end the temporary measure. One of the benefits of OAS is that it is means-tested, meaning that people who are over age 65 and have more than $70,000 income receive only a reduced benefit. Since CPP is conceived as a forced saving pension benefit, it should be fully funded. It is currently near 20% funded, with a goal of reaching 30% funding by 2075. This benefits current recipients at the expense of future recipients.
My preferred solution would be to immediately shift the payments of benefits from CPP to OAS. Current savers should expect to receive their entire CPP benefit from a fully funded public pension at retirement age. Current recipients, however, should receive a larger proportion of their income from OAS (which is means-tested) instead of CPP, especially given that the total contribution was under 4% for many years. Assuming the maximum entitlement, instead of receiving $517 from OAS and $960 from CPP, current pensioners would receive $1285 from OAS and $192 from CPP. More of the money would be subject to clawback, meaning that it would once again become a safety net for elderly Canadians. Once CPP is fully funded, it will provide a greater proportion of government retirement benefits and it will be more secure.
Because only working Canadians are entitled to CPP, but all Canadians who lived in Canada at least 40 years are entitled to OAS at age 65, some modifications would need to be made. A couple where only one spouse worked (2 OAS + 1 CPP) would receive a larger entitlement ($2762 vs. $1994). At the death of one spouse, OAS ends, whereas CPP pays a 60% pension to the surviving spouse ($1400 vs. $1093). Whether or not this would require a greater public expense depends on the income of Canadians over 65 (the age OAS begins). This could be addressed either by reducing OAS or by increasing the retirement age, possibly to 67, and also allowing people to begin CPP as early or as late as they choose.
CPP should maintain the mandatory component, but could add an optional component. This way, 9.9% of each paycheque, up to $4700 per year (currently), would be saved toward retirement. If a worker chooses, they could have an additional amount, possibly 9.9% of each paycheque beyond the current maximum, also saved for their account. In this way, they would either have a larger retirement benefit or an earlier retirement date. Because of the increased fund size, larger provinces, BC, AB, ON, should set up their own provincial pension plan, the way Quebec has.
For healthy people, retirement is not a right. It is a preference that must be planned for and prepared individually. It is helpful that we have CPP to provide forced savings, but it is unsustainable in its current form. OAS is a program that provides for seniors with only moderate income. Shifting the benefits from CPP to OAS would allow CPP to become sustainable and OAS to be modified as conditions require. How would you react to a government proposal of this type? Would you write your MP to endorse it?