Kill Ontario’s pension plan
With the Ontario government’s re-jigging of the Ontario Retirement Pension Plan to slow down its implementation, the government is becoming more realistic about its effect on a weak economy. However, the best approach is to kill the whole idea in the first place.
The ORPP will apply to anyone without a defined-benefit plan or sufficiently rich defined-contribution plan. The premium will be set at 1.9 per cent up to $90,000 of earnings for employees, matched by a similar amount paid by employers, for a grand total of $3,286 per worker. A benefit equal to 15 per cent of insurable earnings will be paid, up to $12,815 per year. It begins with 2017 for Ontario large corporations followed by a one-year delayed implementation for medium-sized firms and a two-year delay for small firms.
Most union and government employees will be unaffected since they have defined benefit plans or sufficiently large defined contribution plans. Those selfemployed or working for corporations and non-profits without a qualifying substitute plan will be affected even if they have group-RRSP plans and other retirement benefits.
As I have written in the past, the ORPP is a hare-brained idea. Here are 10 reasons why.
1 The plan is unneeded for fourfifths of workers who already have sufficient savings for adequate retirement, as shown by Statistics Canada and McKinsey studies taking into account all forms of savings. Instead, the plan will hurt many families with new taxes as they deal with child-rearing costs and invest in housing equity, which is the most important retirement asset in later life.
2 There are pockets of individuals who need support, such as low-income single seniors facing a poverty rate of 20 per cent. A minority of households with modest family incomes below $60,000 do need additional support. Any pension reform should be targeted, not unnecessarily broadbased.
3 The plan unneces- sarily extends to many upper-income households with up to $180,000 in income when two-earners retire. This is well beyond any reasonable notion of what is meant by middle class since most upper-income households have the means to ensure a good standard of living.
4 The plan hurts the middle class. Yet, many middle-class individuals will bear much higher tax rates on plan benefits, especially in the $73,000 to $90,000 range as Old Age Security payments are clawed back.
5 The plan provides a poor return to savings for low-income Canadians who will be provided little personal income tax relief for contributions, yet face a walloping personal tax on benefits with personal taxes and reductions in Guaranteed Income Supplements. This can be fixed but not easily.
6 The personal tax treatment of the ORPP is uncertain. If it is treated similarly to other retirement saving plans under the income tax, the ORPP will provide comparable returns to annuity plans for many middle-income households. If the pension contributions are treated similarly to CPP, only a miserly tax credit based on the low income tax rate is provided as relief, making the ORPP savings a poor investment for many Ontarians.
7 Although it is argued by the Ontario government that the ORPP will increase savings, no doubt there will be a significant reduction in private saving, as many U.S. and Canadian economic studies have suggested in the past, including a recent one by well-respected economist, Francois Vaillancourt and his co-authors.
8 The timing cannot be worse for the Ontario economy, which faces a weak economy with a falling employment rate this past year (last month was an improvement). Taxes will be paid by a large part of the population with no benefits paid out for several years to come, as existing seniors will not get more money.
9 Businesses will face a new set of taxes on employees, much of it shifted back in lower wages over time. In the short run, companies facing international competition will face higher costs along with higher Ontario energy costs, property taxes and new levies to pay for infrastructure (the latter is most critical to achieve growth in the long run, unlike the ORPP).
Any pension reform should be targeted, not unnecessarily broad-based
10 The plan will be expensive to administer. People moving in and out of the province will have to be tracked. Comparable defined contribution plans will be developed by many businesses reducing the need for the ORPP, thereby increasing per unit administrative costs for those in the plan.
Taxpayers will be on the hook for shortfalls – someone must bear the risk with downturns in the economy.
Ontario had better options that would have avoided many of the above issues. It could have created a voluntary pooled saving plan with automatic enrolment (this is more similar to the Saskatchewan pension plan but with a better take-up rate, even with an opt-out feature). The only risk to the province is that enrollees would hold the province liable if the plan had poor returns.
The other option is to push for an expansion of the CPP, which makes more sense than the ORPP. CPP expansion focused on those households with modest incomes (such as raising the replacement rate of working income to 35 per cent) does require 7 provinces representing two-thirds of the population to approve any change, so it is not easy to change. Perhaps, by 2020 the economy will be strong enough to deal with a modest expansion that would be acceptable to governments.
Instead of proceeding with the ORPP, it should be shelved. It is a grand mistake in policy terms.