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Dude, Where’s My Pension?

Tue, July 19, 2016   |   Author: Peter Vogel   |   Volume 23    Issue 29   

The twenty-something generation might not be thinking much about their pensions yet, but they should be. Canada Pension Plan (CPP) payments get taken off each worker’s paycheque, and employers are required to make matching contributions. It affects everyone in the work force.

According to Statistics Canada: “In 1971, the youth demographic dependency ratio was 74 youth for every 100 working-age people. This dropped to 39 youth in 2006 and is projected to drop further to 34 youth for every 100 working-age people by 2056. The opposite trend is evident for seniors. For every 100 working-age people, there were 15 seniors in 1971 and 21 in 2006. By 2056, it is projected that there will be 50 seniors for every 100 workers.” If you won’t retire till the 2050s (maybe earlier), you might be asking, “Dude, Where is my pension?”

By about 2020, CPP will begin operating at a deficit and will start withdrawing from our CPP investments. The Chief Actuary has said that we are good for about 75 years but … with the retirement of the baby boomers, our low live-birth rate, immigration of older people who have not paid into our CPP for much of their working lives and the financial drain on future generations that Stats-Can talks about, will our CPP really be able to fund Canadian retirees for the next 75 years and beyond?

The Ontario government recently proposed to start its own pension plan which would have funds deducted and administered separately from the CPP . . . for the good of Ontarians of course! Their rationale? They expect fewer people to have company pensions when they retire, and CPP will not be adequate.

Remarkably, there is already legislation in place that prevents pension benefits from going up immediately for people who have not paid in at newer, higher rates. Those who are paying in at the mandatory 4.95% of income will not receive the same benefits as those who will be paying in at a higher percentage in future years. This part of the plan is fair, but it is only one part.

I wrote a Communique a few months back on low interest rates—great if you want to borrow, not so good if you want to invest. This situation becomes a problem when there is a large fund to manage which needs dependable growth in a volatile market. Right now there is around $280 Billion, but it needs to grow through wise investment to hold out for the next generations, or the payouts may not be as good and sunny as our finance minister has projected.

CPP money is invested and probably helps the global economy in some ways; the fund has had a good return historically, but what would that money do if it were in the hands of the private citizens who earned it in the first place? Might it not be invested in small and medium sized Canadian businesses rather than overseas or in the US? Couldn’t that money be used more effectively to help our Canadian economy to flourish?

Right now, 9.9 percent (4.95 from both employer and employee) of income (up to $54,900) is put towards the CPP. The percent will likely increase by about 2%, and the amount of income it can be deducted against will also increase (up to $82,700). According to the Fraser Institute, these small changes will make a big difference. The main one will be a decrease in personal savings and the flexibility that goes with these savings:

“…past increases in mandatory CPP contributions found that for every $1 increase in contributions, the average Canadian household reduced its private savings by roughly $1. With reduced private savings come a loss of choice and flexibility. For example, money saved in an RRSP can be used for a down payment on a home, to pay for education upgrading, or withdrawn in case of an emergency. And all the money can be transferred to a beneficiary in the event of death. These benefits are not available through the CPP.”

It’s a little bit like robbing Peter to pay Paul. Canadians are forced to invest together through the CPP rather than directing their own investments.

The CD Howe Institute gave the new plan a mixed review because it will be better for high-income earners, but their press release also said this: “Expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.”

With changes like this, we see an attitude—an arrogant attitude—that says governments and their programs can do a better job of looking after people than people can do themselves. It’s not just about the 10-12%, it’s about the idea that the government should save and invest for you because you aren’t smart enough or responsible enough to do it yourself.

Younger Canadians should be concerned about even the 1-2% change in contribution when rising real estate prices are already squeezing income. Little things add up.

Our better solution: The Christian Heritage Party would institute a Personal Income Security Account (PISA) that would also have a mandatory 10% saving function from the time a person enters the workforce, but it would be based on the individual. It would replace both CPP and Employment Insurance (EI). This would mean a savings of nearly 4% for the average employee! Individuals who needed to draw money from this savings account because of illness or unemployment could draw a maximum of 15% of it out in any given year before drawing on government programs. This limit of 15% would ensure that the account would never be emptied. It would not altogether do away with the need for individual welfare or health insurance, but it would act as a buffer and would give some responsibility and discretion back to the individual.

The average person would have incentives not to withdraw that 15% since that would reduce his or her retirement pension; in the case of unemployment, the average person would be actively seeking a job as soon as possible to ensure his or her PISA is protected.

If you believe in individual freedom in a framework of moral responsibility, CHP has a great balance. If you are not yet a member, please sign up today and help us win the battle for fiscal sanity. If you are already a member, please continue to support your party so that we can continue to offer better solutions for Canada.

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