WHY ONTARIO IS THE BIG LOSER IN THIS DEAL,

With the federal and provincial ministers agreeing to expand the Canada Pension Plan, political reaction may lead you to believe that it will provide substantial new benefits to seniors. Don’t believe it. This expansion is about as small as it can get, just enough to kill off the market- distorting, high- cost Ontario Retirement Pension Plan (ORPP). Why premiers in other provinces agreed to this plan will need to be explained to their electorates, since the ORPP was not their problem.

Indeed, the big loser is the Ontario government, which accepted a CPP expansion much smaller in impact than the ORPP. The Ontario plan would have provided 15 per cent of a person’s lifetime earnings up to $90,000 beginning in 2018 for those without a sufficiently rich employer pension plan. For a person earning an average $ 50,000 their whole life, the ORPP would have been $7,138 per year at 65 years of age after working 40 years. Individuals with $90,000 in average lifetime earnings would have received $12,849 annually. Payroll contributions would have been 3.8 per cent of earnings split between employees and employers.

So how does the CPP expansion compare? It will be mandatory for all Canadians, beginning in 2019, with full implementation by 2025. Benefits rise from one- quarter to onethird for lifetime earnings, about half the ORPP’s proposed increase. The increase in maximum eligible earnings is only 14 per cent ( in today’s terms, an increase from $ 54,500 to $62,130). After 2025, a person having earned $50,000 will get a $4,000 annual pension (this is only $3,281 in 2016 dollars, less than half the ORPP payment). CPP payroll taxes will be two per cent of eligible earnings split evenly for employers and employees, again roughly half of the ORPP’s rates.

For eight years, federal and provincial governments have been pondering the CPP. Starting with claims of a pension crisis, finance ministers took a look at the data and came to the conclusion in 2009 that no crisis existed. This did not prevent advocates, especially unions, from demanding a CPP expansion, especially after the 2009 financial crisis.

However, further studies up to 2015 came to the same conclusion. About four- fifths of Canadians do a good job protecting incomes at retirement with over $9 trillion in net worth including home equity ( the largest retirement asset on an after-tax basis), pension, business and other financial assets. Yes, one-fifth to one-quarter of modest-income Canadians ( those above the lowest income group) faced inadequate retirement income, so some targeted intervention would be appropriate if properly designed.

That did not stop Ontario from introducing a poorly formulated plan predicated on the unsupported belief that workers were not saving enough. The plan would have been costly to administer with employees moving between employers exempt from ORPP and those not exempt, and across provinces.

It would have distorted labour markets with some firms swapping private pension plans for the ORPP if it meant saving on contributions. Still, the province forged ahead, with the proviso that it would withdraw the ORPP given an adequate CPP expansion.

This is a huge comedown for the Ontario government, getting a little less than half a loaf. Perhaps Ontario finally realized that the ORPP was poorly thought out. Other provinces showed little interest in mimicking the problematic plan. Quebec was already facing payroll tax increases to compensate for its Quebec Pension Plan deficit.

So now we have an agreement to thwart the ORPP with unclear benefits for many Canadians.

Current seniors or those close to retirement gain nothing, since they will neither pay contributions to the expanded CPP nor receive additional benefits.

Poor seniors will be hurt especially, to the advantage of the federal government, since they will make contributions at the same tax rate as others but receive potentially only 30 per cent of the benefits due to federal-provincial personal income tax withholdings and the 50 per cent reduction in guaranteed-income-supplement payments for each dollar of CPP benefits. The ministers tried addressing this by enhancing the federal working income tax benefit, but this has little to do with the low if not negative rate of return on CPP savings for the poor.

Single seniors who earned no CPP benefits won’t be helped when their eligible partner passes away; they will get the same, inadequate 60 per cent in survivor benefits.

Many high- income and upper- middle- class Canadians won’t be helped. While new CPP contributions will be deductible from income (rather than treated as a credit at the low-income tax rate), they have other assets to support their retirement.

Younger Canadians could benefit, but if mandatory contributions crowd out first- time home purchases it is not clear much has been accomplished as one retirement asset is substituted with another. The one-point increase in payroll tax rates might hurt young people looking for jobs in weak economies.

Overall, this CPP expansion is teeny, neither much helping nor hurting Canadians. But the expansion could have been targeted to modest- income Canadians, with a better treatment of survivor benefits to assist single seniors.

The real payoff is putting an end to the ORPP and ending this interminable discussion of CPP reform for now, without creating serious harm.

WYNNE GOVERNMENT GETS A LITTLE LESS THAN HALF A LOAF.