Retiring some pension options

With a glut of good ideas for pension reform, Canada faces a nice dilemma.

While Europeans take to the barricades over the issue of pension reform, Canada’s finance ministers will be facing a big decision of their own on the subject when they meet in Kananaskis, Alta., on Dec. 20. Following two previous semi-annual summits focused on redressing the decline of pension coverage among middle-income Canadians, the options have boiled down to two: expanding the Canada and Quebec pension plans with higher contribution limits, or creating a new kind of private, portable supplementary plan that follows you from one job to another.

The Province of Ontario, organized labour, senior’s groups and 78% of respondents to a union-sponsored Environics poll have all indicated strong support for the CPP option. It wouldn’t require a new bureaucracy to run it, and the CPP is by most accounts solvent, well-managed and well-governed.

However the CPP boosters will encounter stiff resistance from the meeting’s host, Alberta finance minister Ted Morton, as well as a number of prominent pension experts. The problem with extending CPP coverage, they say, is it will force new payroll costs on both employers and employees, even those already well covered by employer-sponsored plans and RRSPs. The alternative, portable pensions offered by insurance companies, would not force employers to contribute, and would allow individuals to opt out or reduce their contribution rates to match their needs.

Two recent papers point to compromises between the two choices that could make either option more palatable to the other side. Jon Kasselman of the University of Calgary’s School of Public Policy explored the ramifications of enlarging the CPP, including its potential (in concert with the Guaranteed Income Supplement) to eliminate taxpayer- funded Old Age Security, and the possibility of making the enhanced portion of CPP coverage voluntary.

Patrik Marier of the Institute for Research in Public Policy, meanwhile, examined supplementary pension schemes around the world and found the most applicable model close to home in Saskatchewan. The Saskatchewan Pension Plan, designed for homemakers and the self-employed, could be expanded to other provinces alone or in competition with other privately run portable plans, Marier suggested.

A third paper, from the University of Toronto’s Mowat Centre, raised another possibility for reform (though unrelated to the agenda at the Kananaskis meeting): gradually raising the age of eligibility for full CPP benefits from 65 to 67. Reaction from pension experts was mixed, with prominent actuary Malcolm Hamilton arguing it solves a non-existent problem, while Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, said it would give the Canadian system a needed cushion in the face of rising longevity.

Federal Finance Minister Jim Flaherty needs the consent of seven provinces representing two-thirds of the population to push either the CPP or the private-sector option through, and he has not tipped his own hand as to the federal government’s preference. But this is politics, and there may be some horse-trading involved. He might decide to back Morton in return for a quid pro quo on another issue that divides them — the proposed national securities regulator, which Morton opposes.

In his November newsletter, Ambachtsheer gave both options a qualified thumbs-up, predicting that either one, properly executed, could propel Canada to the top of international pension sustainability rankings. ‘But we must choose,’ he wrote. ‘Trying to ride both reform horses to victory would be a losing proposition for all Canadians.’

Of course, the stakes here in Canada remain much lower than for Europeans, who rely almost entirely on public pensions to fund their retirement. Our patchwork mix of government-, employer- and individually funded retirement savings has spared us the kind of systemic breakdown seen from Ireland to Greece. And given the levels of social unrest in those countries, that could be the strongest argument against putting more of our pension nest eggs into the CPP basket.