Why did holdouts cave on CPP?

Whether you like the federal Liberal government’s new deal with eight provinces to enhance the Canada Pension Plan likely depends on whether you think you require someone to force you to save adequately for retirement, or whether you would rather be trusted with that responsibility for yourself.

There may be other reasons that recommend the deal, which will increase CPP payments for workers and employers by one per cent each, and maximum benefits from one-quarter of average lifetime earnings to onethird.

A big one is that it finally kills Ontario Premier Kathleen Wynne’s plan to erect an entirely new, much more convoluted provincial pension plan. That, realistically, may have been the chief purpose of Monday night’s deal, so widely abhorred was Wynne’s pension scheme. With the new CPP deal in hand, she immediately cancelled the Ontario Retirement Pension Plan, while making sure to publicly boast of having dragged the provinces into CPP talks by being a “thorn in the side” of other premiers.

Certainly several were unenthusiastic about it. We will likely never know what inducements the federal Liberals dangled in front of British Columbia, in particular, whose initial dissent, given its size, threatened, along with Quebec’s opposition, to stop the new CPP deal from winning the necessary approval of two-thirds of the population. Saskatchewan, too, suddenly dropped its unwavering resistance to saddling workers and employers with bigger CPP deductions.

Perhaps the slow timeline mollified them, with contributions beginning to rise only in 2019 and not fully until 2025. Or perhaps the premiers of Saskatchewan and B.C. were won over by Finance Minister Bill Morneau’s charm. Only those inside the room know whether promises of federal approval for a B.C. liquefied natural gas plant or reforms to Saskatchewan’s employment insurance were raised.

But the last time a Liberal government secured provincial support for CPP reform, Ontario came away with a promise from Ottawa to start collecting sales tax from cross-border shoppers.

What surely did not seal the deal was any urgent need for a new plan. Wynne’s overblown claims of a “retirement crisis” notwithstanding, most studies showed that only a fraction of Canadians, deep in the middle class, either lacked an adequate pension or were saving less than they should to maintain 50 to 70 per cent of their pre-retirement income in their pensioner years. That’s the government’s savings rule of thumb, anyway, although even it has been criticized lately as being unnecessarily high, with many seniors finding themselves so overprepared for retirement that their rate of personal savings outpaces what it was in their working years.

Nor is the new model so well designed that the previously reluctant premiers of B.C., Saskatchewan, Quebec and Manitoba could hardly resist signing on. As economist Jack Mintz points out, the new plan appears to set back Canada’s most vulnerable retirees, with poor workers contributing at the same rate as everyone else, only to eventually face disproportionately higher effective taxes on their benefits, after their guaranteed income supplement is clawed back. Mintz reckons this may amount to negative returns for them. Nor does this remodelled CPP help a widow without CPP income, who is still denied a large portion of her spouse’s benefits.

The most notable impact will be on middle-class earners, who will pay hundreds of dollars more every year in exchange for larger benefits after retirement. Many, if not most Canadians in that category were well taken care of already, through workplace pensions and diligent savings. For the remaining few yet to make sufficient arrangements — perhaps 10 or 15 per cent of the workforce — everyone else in the country will now be forced to make do with a little less income every month.

But then, there was never any certainty that these few undersavers were doing anything irrational. It is utterly common for families to run financially lean, with little savings, while raising children and paying down mortgages, only to rapidly amass savings late in their career, when earnings tend to be highest.

It is also surely the case that some Canadians intend to retire to a more modest lifestyle, preferring to spend their hard-earned income while still young enough to fully enjoy its fruits. This week, Toronto Life ran as its cover story the tale of Tony, a 30-something pharmacist earning six figures a year who prefers to live with his parents rather than buy a pricey house, and splurges on “travel, expensive wines and … the best restaurants.” A financial adviser or finance minister might judge Tony imprudent, but he says his “guiding philosophy is that life is short and we should savour every moment.” Who’s to say he shouldn’t be able to?

Actually, just those kinds of critics are not hard to spot. After the CPP deal was revealed, The Globe and Mail’s personal finance writer praised the effortless nature of forced public savings for providing “zero-stress income for life after you retire.” In the same publication, Wilfrid Laurier University economist Tammy Schirle argued that a costlier CPP obligation is commendably useful as a “commitment device, forcing individuals to put away part of their paycheque.”