PBI Actuarial Consultants supports Federal Finance Minister Flaherty’s two-pronged approach to pension reform including limited enhancement to the Canada Pension Plan (CPP) and legislative amendments that would facilitate large, multi-employer plans.
“The CPP scale and structure are already there and the financing mechanism is in place,” says PBI actuary and President Tony Williams. “It would still leave room for supplemental plans but provide more working Canadians with a floor of pension benefits.”
The CPP changes proposed by PBI are:
- An additional 15% (from 25% to 40%) of the Year’s Maximum Pensionable Earnings (YMPE for 2010: $47,200) accrual layer for future CPP/QPP service only
- Increase YPME to about 1.5 times the average wage
- Normal retirement age at 67
- No built in retirement subsidy
- Self-financed based on 50% employer/50% employee contributions
Williams recognizes that increasing the normal retirement age to 67 for future service could be a hard sell, but he sees this as an essential cost control mechanism of an enhanced CPP program. “People are joining the workforce later. It’s unrealistic to think people can start in the workforce at 30 and retire in their late 50s with a high pension. The numbers just don’t work out.”
In a Policy Brief prepared for the Canadian Centre for Policy Alternatives, economist Monica Townson notes public programs in Canada only cover incomes up to the level of the average economy-wide wage, yet comparable programs in other OECD countries cover earnings up to almost double the average wage. For example, U.S. Social Security Programs cover earnings up to U.S. $106,800 (roughly 2.5 times the average wage in Canada at current exchange rate). The PBI proposal is more modest, but covers more workers’ earnings.
Although PBI acknowledges that determining the cost of changes is complex and will be a key element of future consultations, based on currently available information they estimate their proposal could increase combined employer/employee contributions from 9.9% to under 14%.
This is consistent with a proposal to double the CPP replacement rate from 25% to 50% of the YMPE by the Canadian Labour Congress (CLC) which projects that by 2016 combined employer/employee contributions would increase from 9.9% to 15.9% of the YMPE.
Williams acknowledges business concerns that CPP increases will mean higher payroll taxes but he says, “It isn’t logical to focus on the increased cost of expanding CPP without acknowledging RRSPs are inefficient and can’t deliver the same benefit for equivalent costs.”