Posted: Monday, 30 August 2010

The best way to help today’s workers save enough for retirement is by increasing what everybody gets from the Canada and Quebec Pension Plans.

The Canadian Labour Congress is proposing a gradual doubling of future CPP benefits. A modest increase in contributions today will produce thousands of dollars a year in extra benefits for workers when they retire.

Thousands of Canadians along with citizens’ and retirees’ groups agree with us.

Our proposal has won support from a majority of Canada’s Finance Ministers and from mayors and city councillors.

But our plan has come under attack from special interest groups who are scare mongering and spreading lies about our proposal. Let’s set the record straight about our plan for the CPP.

FICTION #1

Labour’s plan to gradually double future CPP benefits will double CPP contributions for workers and employers.

THE FACTS:

The reality is that a gradual doubling of future CPP benefits can be paid for by a modest increase in contributions, spread out over 7 years.

This would mean increasing what everyone contributes to their CPP savings by about 0.43% of pensionable earnings each year for 7 years.

For a worker earning $47,200 or more per year, the initial cost of gradually doubling future CPP benefits works out to about 9 cents an hour, or $3.57 a week. That's less than the cost of a newspaper subscription.

For a worker earning $30,000 per year, the initial cost would be about 6 cents an hour, or $2.27 a week. That's less than the cost of a medium double-double with a donut at Tim Hortons.

This is first-rate retirement savings at a low cost.

FICTION #2

 Labour’s plan for the CPP is a job-killing tax.

 THE FACTS:

CPP contributions do not discourage employers from hiring workers. In 1997, the unemployment rate was 9.1%. That year, the federal government announced plans to increase CPP contributions for both workers and employers from 3.0% of pensionable earnings to 4.95% over a five-year period. The move was immediately labelled a “job-killing payroll tax-hike” by business lobbyists. Yet by the time the increase in the CPP contribution rate was fully implemented in 2003, the unemployment rate had fallen to 7.6%, and it continued to fall until 2009..

FICTION #3

The CPP won’t be there for young workers when they are ready to retire.

THE FACTS:

The reality is that the CPP is recognized as one of the most stable pension plans in the world, and it will be there for the next generation of workers when they retire.

The CPP is actuarially sound (meaning it is guaranteed to deliver, as promised) for the next 75 years. Today's young workers have nothing to worry about, nor do their kids.

FICTION #4

Expanding the CPP will hurt younger workers because they will have to pay more to provide improved benefits for older workers.

THE FACTS:

The reality is that a gradual doubling of future CPP benefits would be fully paid for on a go-forward basis. Future benefits for each worker will be based on the number of years that worker made expanded contributions.

Right now, one-third of Canadian workers aged 24-64 have no personal retirement savings at all. Today's young workers will benefit the most as they will be able to save more for retirement and get more from the CPP when they retire.

FICTION #5

Expanding the CPP will hurt lower income workers who cannot afford to pay for increased premiums.

THE FACTS:

The reality is that the CPP already exempts the first $3,500 of income when it calculates everybody's contributions – that’s a policy designed to make contributions easier for low income workers.

It is lower income workers who stand to gain most from a gradual doubling of future CPP benefits. The increased contributions needed to pay for those improvements will be modest and phased in over seven years.

The cost to workers who earn $10,000 per year to expand the CPP is just 2¢ an hour each year over the next seven years. This will pay for a future doubling of CPP benefits. This is first-rate retirement savings at a low cost.

Most low income workers have no workplace pension plans and if nothing changes they are destined for a life of poverty or near poverty in retirement.

Yeah but...

I don’t want higher CPP premiums on top of what I currently pay into my workplace pension.

THE FACTS:

The vast majority of workplace pensions are “integrated” with CPP benefits, so any increase to CPP premiums means you pay less into your workplace plan.
The result: you get the same pension income, just more of it from the CPP. And remember, the CPP is far more secure than many workplace pensions. Among other things, it is indexed to inflation, portable across jobs, and accommodates years of lower earnings (such as time away from the workforce to raise a family).

Also, because workplace pensions will be paying out less under an expanded CPP, money could be available to improve workplace pension benefits (or other aspects of compensation). In other words, an expanded CPP improves the position of unions at the bargaining table.

What about small businesses?

Contrary to what some might think...
Small businesses have responded positively to our plan. They recognize that CPP is the best value for money, given its low management costs, portability and security.
The Canadian Federation of Independent Business (CFIB) claims to have survey results indicating its members are opposed to this. Our own scientific poll conducted by Vector Research tells a different story.

68% of small business owners thought people with good pensions were good for business.  Over half of small business owners surveyed supported expanding
the Canada Pension Plan.  Expanding the CPP offers small business owners the risk-free stability of a defined-contribution savings plan, while delivering the guarantee of a defined-benefit pension plan for their workers. It also allows owners themselves to save more through an expanded CPP.

Topping up retirement benefits with a workplace pension plan would become a more affordable option for most small businesses. As everyone’s CPP savings grow over time, workplace pension plans would have less retirement income to cover, resulting in lower contribution costs.

Can we afford do do this?

yes: in fact, we can’t afford not to do this.  Let’s face it. For an entire generation of Canadians, wages failed to keep pace with the cost of living and raising a family, let alone saving for a long retirement. Many Canadians have not managed to save what they need. Even when we have had extra money to tuck away, the RRSPs and mutual funds we were advised to buy have failed to deliver on their promises.

The system we have is leaving too many people behind. Which is why it’s time to change a few things, so it doesn’t get any worse.

Here’s where we stand today:

• The median RRSP savings for workers aged 55 and older is just $60,000 (which means half of them have less). This works out to a monthly income after retirement of just $250 – if you’re lucky enough to have any RRSPs.
• Almost 70% of Canadians do not have an RRSP. One third of Canadian workers, aged 24 and older have zero personal retirement savings – nothing.
• The average monthly payout from public pension plans (OAS and CPP)
• is $1000.
• Over 60% of working Canadians (about 11 million people) have no workplace pension. They are expected to fend for themselves with what they have.
• More than a third of all seniors receiving public pensions (OAS and CPP) – about 1.6 million Canadians – earn less than $11,000/year.

Meanwhile, just under 40% of working Canadians rely on workplace pension plans. Most of these workers belong to unions, who negotiated pension plans with employers as one of the many benefits that come with union membership (like extended health coverage, scholarships, longer vacations, skills training, etc).

Today, many workplace pension plans are in trouble due to employer negligence or the collapse of financial markets that led to the recession of 2008.

Q & A

Q. CPP contributions come off my paycheck, just like EI and taxes. How do I know the money being taken off my paycheck is going to be there when I retire, and not wasted or used for some other purpose? In the 1990s, Finance Minister Martin drained $60 billion out of the employment insurance fund in order to pay off the deficit. Meanwhile, workers paying into the fund got shafted when they lost their jobs.

A. The difference is that the government can't touch the CPP fund. The Canada Pension Plan is entirely funded by the money you contribute, and the matching contribution your employer makes; it doesn't depend on tax revenues, and the money in the CPP fund is kept separate from general government revenues. The government does not own the funds in the CPP. By law, CPP funds may not be used for anything other than paying benefits to pensioners and their survivors, administering the fund, and investing to ensure future growth. The CPP Investment Board, which manages the plan's assets, operates independently and at arm's length from government, to avoid any political interference.

Q. The CPP is just a ponzi scheme - active workers are paying to support the retirement benefits of a growing number of retirees. This isn't going to last, since the number of seniors for every working-age Canadian is set to double in the next 25 years.

A. Major changes made to the CPP after 1997 put the CPP on a solid financial footing. The CPP Investment Board currently manages $140 billion in assets, twice the amount that existed in the fund 7 years ago. The CPP won't have to begin drawing on income from this investment fund for another 10 years, since CPP contributions will exceed benefits paid out until 2021. After this, contributions and a small portion of investment income will be sufficient to pay pension benefits. The most recent actuarial report on the CPP confirms that “the Plan is able to meet its financial obligations and is sustainable over the 75-year projection period,” the furthest into the future that actuaries can assess the health of the plan.