Key issues to consider in voluntary pension
Last week I was a guest on a CBC Calgary phone-in show. The question for listeners was: “Would you contribute to a voluntary expansion of the Canada Pension Plan?”
The answers were unanimous: “No.” The reasons varied widely. A couple of callers said they didn’t have any extra money to put aside for retirement. Another was concerned the government would “take away” his extra contributions and give nothing back in return. One outspoken caller said he didn’t want the “nanny state” handling his money and preferred to make his own investment decisions.
(Actually, the “nanny state” has done a pretty good job looking after the $219 billion in the CPP. The Canada Pension Plan Investment Board recently reported a 16.5-percent gross rate of return for fiscal 2014 — the second-best result in its history. Over the past decade, which includes the crash of 2008-09, the CPPIB has produced a net average annual compound rate of return of 7.1 per cent. But I digress.)
Obviously, the sample size from the Calgary radio show was very small and Albertans tend to be suspicious of big government. But the program left me wondering how people in other parts of Canada might react to the same question.
Two weeks ago, this wasn’t even an issue. Then Finance Minister Joe Oliver stunned everyone by announcing the Conservative government is considering doing an aboutface on its previous opposition to expanding the CPP by bringing in a voluntary plan. He provided no details, beyond saying that employers would not be forced to match any voluntary contributions.
As for the rest, all we know is that the government will study the concept over the summer. There is no commitment to actually implement such a plan.
In fact, previous studies concluded that a voluntary extension of the CPP isn’t practical. Oliver implied that recent findings have been more encouraging and said the government will consult with “experts and stakeholders” in the next few months to determine if the idea is feasible and, if so, in what form.
A voluntary program is the Conservatives’ counterproposal to calls for a mandatory expansion of the CPP to boost retirement benefits for middle-income Canadians. Right now, the maximum CPP benefit is $1,065 a month ($12,780 a year). Advocates of expansion, including the federal Liberals, say that’s not enough.
The Harper government has adamantly opposed a mandatory increase in CPP contributions, arguing it would discourage job creation because employers are required to match employee contributions up to $2,479.95 this year (the amount increases annually with inflation). The Conservatives view this as a payroll tax and warn that increasing employer contributions would be “job killing.” Business groups tend to agree with them.
So how would a voluntary plan work? At this stage, no one knows because we have no details. But here are some of the key issues that will have to be dealt with: 1) Opt-in or opt-out? An opt-in plan would require people to proactively apply to be included. An optout program would automatically enrol everyone who currently contributes to the CPP, then allow those who wish to drop out to do so. Inertia being what it is, the opt-out approach would almost certainly result in higher participation. 2) Contribution formula. How would the voluntary contributions be structured? Would every individual be allowed to decide how much to pay in (and therefore what additional benefit would be received later)? Or would we have a standardized formula as we do now? The latter would be much easier to track and administer, but the inability to tailor contributions to overall family financial needs might turn many people off. 3) Continuity. Once people commit to extra voluntary contributions, can they change their minds — for example if they encounter a financial crisis? Imagine the administrative chaos that would ensue if Canadians could opt in and out of the new plan at will. 4) Expenses. One of the reasons the CPP as now constituted is so cost-efficient (operating costs are only 0.339 per cent of assets under management) is that it doesn’t have to maintain millions of individual accounts. All participants operate under the same formula. Contrast that with RRSPs, where every account is different in terms of contributions and accumulated assets. A voluntary CPP could move us in that direction, at a cost to all plan participants. 5) Optics. The Conservatives have been criticized for raising the contribution limit on tax-free savings accounts on the grounds that mainly the rich will benefit. How is a voluntary CPP any different? An argument can be made that only the relatively well-off would have the extra money to contribute to a voluntary CPP. Of course, a mandatory expansion of the plan would force everyone to ante up more, whether they want to or not. 6) Other options. Given the choice between a voluntary CPP, an RRSP, or a tax-free savings account, which would people choose? The CPP offers low costs and great management. But the RRSP is more flexible — you can borrow to buy a home or take out money if you need it. A TFSA offers the allure of taxfree withdrawals down the road, where CPP benefits and RRSP/ RRIF withdrawals are taxed at marginal rates.
So, going back to the question asked on the Calgary radio show, what’s your view? Would you contribute to a voluntary CPP if it were implemented? Your comments are welcome. You can post them on line or send them directly to me: gordonpape@hotmail.com. Please write Star Comment in the subject line. Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is BuildingWealth.ca