The Prime Minister surprised Canadians, including
his own caucus, when he proclaimed from the high perch of Davos that
Canadians' pension system was about to change. After first denying what
he had said in Davos, it became clearer that the next budget will
include a plan to change the age at which Canadians qualify for CPP to
67. None of this, not Old Age Security, Guaranteed Income Supplement or
the Canada Pension Plan were mooted as a target for new policies in the
election. If mentioned at all, it was only to assure Canadians that
pensions were secure.
The
general narrative put forth now sounds plausible. The demographic shape
of Canadian society is changing. More of us will be older as those born
in the post war baby boom, roughly from 1947-1957, enter our senior
years. (I can say "our" as a 1954 vintage boomer myself). The story is
that all of us will be old and far too few young people will be around
to work to generate the wealth to cover our pensions. It sounds
plausible until examined. No one is anticipating that the GDP will
collapse with fewer workers. We assume the GDP grows because we
anticipate the economy will be buoyed by immigration and by less labour
intensive economic activity.
Moreover,
the Parliamentary Budget Office report (issued Feb. 8) states that,
having off-loaded two per cent of health-care costs on the provinces,
Ottawa has room to absorb the bump created by retiring baby boomers. In
fact, the PBO report says we can increase Old Age Security. Debates
about pension reform have pitted the Harper Conservatives who refuse to
enhance CPP, against many premiers and opposition parties. Pension
reforms must be built upon the system that will best create decent
pensions that will keep the elderly out of poverty, require minimum
additional contributions and have low administrative and investment
costs.
The
only system that is capable of meeting these goals is the CPP, a proven
system that is the envy of many countries. Its systems can be modified
to offer enhanced benefits. Everyone is familiar with the CPP, which is
in sound financial health with the latest actuarial report noting that
it is sound for at least the next 70 years.
Approximately
35 per cent of older citizens 1.6 million seniors are still dependent
upon Guaranteed Income Supplement (GIS) to keep them out of poverty.
This is partly because current the CPP objective of just replacing 25
per cent of the average industrial wage is too low. A 50 per cent income
replacement ratio would dramatically reduce the reliance on GIS to keep
the elderly out of poverty and reduce the cost of GIS to the federal
government by billions annually.
The
Year's Maximum Pensionable Earnings (YMPE) should be raised to at least
$90,000 and consideration given to raising it to the full Income Tax
Act (ITA) limit for Registered Pension Plans (RPP) of ($122,222 in 2009)
pending an evaluation/review in a decade.
Subject
to an actuarial evaluation, it is expected that these benefits could be
achieved with a phased-in increase of CPP contribution rates from the
current 9.9 per cent to approximately 14.5 per cent, most, if not all, of
which would be offset by reductions in workplace pensions for those with
workplace pensions. Redirected GIS savings could be used to offset some
of the required contribution increase.
An
honest evaluation of the effectiveness of current tax policy will
illustrate how inefficient it is for most retirement savings. Net
federal RPPs tax expenditures (concessions) were worth $17.6-billion and
$11.3-billion in 2007 and 2009. RRSPs cost $12.1-billion and
$8.5-billion in the same years. The loss of provincial revenues adds
another 35 per cent to 40 per cent.
Defined
benefit (DB) plans are much more efficient than defined contribution
(DC) plans in that they produce significantly higher pensions for the
same contributions, yet DC plans get the same tax support.
RRSPs
are terribly tax inefficient in that for the $8.5-billion to
$12.1-billion in annual net tax expenditures (around 30 per cent of
total contributions), the median value of RRSP assets by Canadians under
age 65 is a woeful $40,000 and those over 65 have less than
$55,000insufficient to supplement one's pension, especially at today's
annuity rates. Only 25 per cent of working Canadians contribute to
RRSPs, only six per cent with incomes under $20,000. Pro-rating tax
expenditures to the value of projected pension would bring fairness and
equity back into the system.
Phasing-in
the doubling the target income replacement rate to 50 per cent and the
doubling the YMPE over the next 47 years is the most efficient way to
ensure that future retirees will be able to retire with dignity without
intergenerational subsidies.
It's
time to have an open discussion about the fiscal, health, and social
implications of the aging population. Let's start by looking at the
evidence before jumping to conclusions.
Green Party Leader Elizabeth May also represents Saanich-Gulf Islands, B.C.