CHAPTER TWO: MANDATORY PUBLIC PENSIONS

Witnesses generally acknowledged that the Canada Pension Plan (CPP) is a secure and dependable element of Canada’s retirement income system and that, as a result of the 1997 reforms, the Plan is both fiscally sound and sustainable. As the Canada Pension Plan Investment Board’s Mr. Donald Raymond noted, it will be ten years before the first dollar of investment income from the CPP fund will be needed to help pay benefits.

Mr. Raymond pointed out that CPP retirement benefits are fully indexed and fully portable for life, and that risks are pooled among a very large number of individuals. Additionally, the CPP Investment Board is able to remain autonomous and to act in a manner consistent with its mandate to maximize investment returns without undue risk of loss over the long term. Since the fund is so large, the CPP can take advantage of economies of scale, and administrative costs are relatively low. Mr. Réjean Bellemare, of the Fédération des travailleurs et travailleuses du Québec, also noted that the CPP is fully transferred from one employer to another and takes into account a worker’s very low income periods, with measures such as dropout provisions.

Despite favourable comments about the CPP, witnesses proposed a variety of changes in relation to the Plan. Their proposals were essentially focused on the creation of an additional mandatory defined benefit pension plan modelled on the CPP and measures designed to increase retirement benefits from the Plan.

Figure 2: Maximum and Average Monthly Benefits from Canada’s Public Pension System,
Various Months and Years

Source: Service Canada http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml and http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml.

Notes: Average benefits in December 2009 for the Canada Pension Plan, and January 2010 for OAS and GIS benefits. Maximum benefits in April-June 2010 for OAS and GIS benefits, in 2010 for the CPP. “Maximum annual income cut-off” refers to the maximum income that may be gained before an individual completely stops receiving those benefits.

AN ADDITIONAL MANDATORY UNIVERSAL PENSION PLAN

Ms. Susan Eng, of the Canadian Association of Retired Persons, advocated a mandatory universal pension program that would be separate from—but modelled on—the CPP. In support of such an approach, she stressed the importance of universality, adequacy and robustness for any universal plan, and noted that all of these characteristics exist with the CPP. She argued that a mandatory system is necessary because, despite tax incentives, a significant portion of employers and individuals have not voluntarily established adequate private retirement savings plans. By utilizing the existing payroll deduction mechanism, administrative costs would be minimized. With her proposal, the defined benefit plan would be professionally managed, involve a governance role for plan members, and have a mandate focused entirely on optimal performance and independence from government or any single employer. Ms. Eng indicated that public-sector workers currently receive 70% of their pre-retirement income through their pension plans; in her view, a discussion is needed about how a universal pension program would bridge the gap between these public-sector plans and the 25% replacement rate provided by CPP for individuals who might need it.

Ms. Eng argued that her proposed universal pension plan should use the structure of the CPP so that political interference would be minimized. She indicated that one of the major advantages of a broadly based pension scheme is that it is not dependent on, or subject to, the circumstances or priorities of a single employer. In her view, the CPP has been sheltered against such practices as contribution holidays and relaxation in requirements related to the funding of actuarial deficiencies. Although Ms. Eng believed that the CPP is an excellent model for a universal pension plan, she did not advocate an increase in the CPP’s replacement rate. She warned that a single, national fund would be too unwieldy to manage. She also raised a concern about a lack of diversification of risks, as most Canadian retirement savings “nest eggs would be in the same basket.”

ENHANCEMENTS TO THE CANADA PENSION PLAN

Mr. Bellemare, as well as Ms. Patty Ducharme of the Public Service Alliance of Canada, expressed their support for a July 2009 report by the Canadian Labour Congress (CLC), which proposed a doubling of CPP retirement benefits, with a corresponding increase in the amount of employer and employee contributions; these changes should be implemented over a seven-year period. According to the University of Saskatchewan’s Mr. Daniel Béland, who appeared on his own behalf, changes to the CPP would be complicated—although  not impossible—to achieve, since changes to the CPP could involve changes to the Quebec Pension Plan (QPP) and would require the consent of two-thirds of the provinces with two-thirds of the population. In his opinion, QPP contribution increases are already being discussed in Quebec in an effort to address the Plan’s fiscal challenges.

The report by the CLC also advocated an increase in the Year’s Basic Exemption for earnings subject to CPP contributions from the current $3,500 to $7,000. Moreover, Mr. Béland proposed that the Year’s Maximum Pensionable Earnings (YMPE), now at $47,200, be raised to a level that is more consistent with international standards; he noted that the comparable amount in the United States exceeds $100,000.

The Rotman International Centre for Pension Management’s Mr. Keith Ambachtsheer, who appeared on his own behalf, highlighted several advantages and disadvantages of increasing CPP benefit rates and the YMPE. For example, he noted that while individual Canadians vary in their retirement savings arrangements, it would be difficult to find a solution that is equitable for all Canadians, since the notion of mandatory saving provides little flexibility. He also expressed concern about the increased labour costs imposed on small businesses as a result of mandatory CPP contribution rate increases. Mr. Ambachtsheer agreed with Ms. Eng that a larger CPP fund would become too large to manage. However, Mr. Raymond assured the Committee that, if asked to do so, the CPP Investment Board could manage the additional funds, as they have anticipated a significant increase in the size of the fund over time. Mercer’s Mr. Malcolm Hamilton, who appeared on his own behalf, advocated an increase in the YMPE without an increase in the replacement rate. He supported the full funding of benefits in order to be fair to future generations.

In addition to enhancing the CPP, the CLC report that was brought to the Committee’s attention by Ms. Ducharme also advocated a one-time 15% increase in the GIS benefit. Ms. Eng and Mr. Béland also supported such an increase. As noted above, Mr. Whitehouse suggested that OAS and GIS benefits should be indexed to growth in average earnings to ensure that retirees’ standard of living is not affected by inflation.