A win for the next generation
COMMENT
While it may come too late to benefit Canada’s baby boomers, Monday’s announcement that all but two provinces are on board with expanding the Canada Pension Plan should come as welcome news to the generations that follow, including the boomers’ children.
In an ideal world, we would all enjoy inflation- indexed employer- provided definedbenefit pension plans, but that’s just not in the cards for most mobile young workers. At 24, my daughter is one of them and I’m happy she’ll eventually benefit from a CPP that aims to replace a third of earned income to the new higher earnings ceiling of $ 82,700 (by 2025). That compares to just 25 per cent currently on a lower ceiling of $ 54,900 ( in 2016, up from $53,600 in 2015, according to the Canada Revenue Agency).
Robb Engen is a fee- forservice financial planner and the “Echo” half of the popular Boomer & Echo website. On the weekend, on the eve of the historic CPP announcement, Engen made the case for CPP expansion, especially for the majority who l ack t raditional DB pensions: “Anyone without the luxury of a defined benefit- pension plan should be automatically enrolled into a newly expanded CPP,” he says.
And that’s coming from someone who, like myself, has been himself enrolled in a DB pension. “It’s the ... 70 per cent of the workforce without access to a workplace pension who needs the expanded program to help fund their retirement savings. I’m also not worried about seniors today; the vast majority won’t be eating cat food in their old age — far from it.”
Well, as a self- employed “near senior” I can speak to that. While I’m no longer contributing to CPP, I do plan to defer receipt of benefits until my late 60s in order to generate higher annual benefits like an expansion would do. Truth to tell, I am a little envious of younger people and wish they had introduced the higher earnings ceiling long ago.
Of course, the private sector is predictably bleating about the higher “payroll taxes” that an expanded CPP will entail. Typical is the stance of the Canadian Federation of Independent Business, which termed the CPP expansion “a devastating move for Canadian workers and the economy in general.” Even then, however, the CFIB saw a silver lining in the announcement that the Ontario government will scrap its controversial( and quite unpopular) Ontario Retirement Pension Plan. ORPP is “the CPP’s far uglier cousin,” said CFIB president Dan Kelly in a release Monday.
The Canadian Life and Health Insurance Association is a little happier with the planned expansion. In a press release late Monday it said the industry “welcomes” the move to address “gaps in retirement savings by Canadians.” But it would like to see a more targeted approach, raising contributions for incomes above $ 27,500 and eliminating clawbacks of CPP/QPP benefits for surviving spouses who live below the poverty level.
The CLHIA also wants to encourage and facilitate “savings in the workplace, where it is easiest to save.”
Well, yes, but that brings us full circle to the fact that fewer employers offer traditional DB pensions. And even if they did, most young workers won’t hang around long enough to benefit from them the way boomers’ parents ( and some boomers themselves) did. The PRPP ( pooled registered pension plan) is a more recent workplace pension program that behaves more like a definedcontribution plan, but is by no means universal and places investment risk on the shoulders of plan participants.
By contrast, CPP insulates participants from market risk and poor investment decisions, is well integrated with employer payroll systems and is (almost) national in scope, even if Quebec sticks with its own system and Manitoba is a holdout on the expansion. For the next generation that is finding it harder to save, it will be the closest thing to an inflation- indexed DB pension or annuity that follows them through various job changes.
Yes, employers and their workers may have to dig a bit deeper to fund it, but the tax- withheld- at- source system demonstrates you don’t miss (too much!) what you don’t actually see. In the long run, such forced savings will pay off for the next generation. They should celebrate this decision.