Retirement crisis? What crisis?
Ontario’s coming pension plan is a solution to a problem that doesn’t exist, says Carleton University business school professor Ian Lee. There’s no need to create it, or expand the Canada Pension Plan for that matter.
People are saving enough, in a way that may not be obvious and as a group Canadian seniors are fine. The over-65s have an average $650,000 in assets, according to Statistics Canada, Lee told a Toronto pension conference this week.
Programs like the Ontario Retirement Pension Plan (ORPP) coming in 2017, or improvements to the CPP, are the wrong focus, Lee told the gathering. It was sponsored by University of Toronto’s Centre for Industrial Relations and Human Resources and specialty publisher Lancaster House.
A far better use of national resources is to become the country with the lowest rate of senior poverty. We’re already third behind France and the Netherlands. Why not be number one?
Lee argued that while the debate is all about enriching public pensions, these initiatives help those who don’t need it. If upper income groups can’t, or won’t, save it’s because they’re making a strategic choice not to.
“Is it the role of government to help upper middle class people, who have not saved, to save?” he asked. “There is a perception that the ORPP will benefit the lower 40 per cent. It won’t. It will help the upper 60 per cent.”
Lee believes young couples are diverting their savings into real estate as they start raising a family. They know they can’t afford a house and an RRSP, so they choose the house. They’re betting that the twin energizers of rising prices and a falling mortgage will build a nice asset over time. As a bonus, when they sell the house, the money is tax free.
Lee says the proof of this calculation lies in the fact that Canadian home ownership at 70 per cent, is among the highest in the world. A 2012 BMO Retirement Institute study found evidence of this thinking. It reported that a third of Boomers plan to use their home to finance their retirement.
Lee says they’re swapping big homes for condos — contributing to that boom — or moving to smaller communities with good hospitals, transportation links and other services.
Lee’s beef with the ORPP is that it takes money out of people’s pockets by forcing them to save. It taxes employers by forcing them to match the employee amount. Both hurt the economy. Both also run roughshod over the role of personal choice in spending and saving.
“Taxpayers choose to invest some of their monies in real estate, some in investments, some in travel,” he told me later. “Mandating — compelling by law — eliminates the discretion of the taxpayer and reduces the amount that can be invested where they want.”
The ORPP will be mandatory for three million Ontarians without a company pension and will be phased in as of Jan. 1, 2017. It aims to replace up to 15 per cent of their earnings to a maximum annual income of $90,000. Both employees and employers contribute 1.9 per cent of earnings up to that maximum level.
As an example, a $60,000-a-year earner would pay $1,140 a year ($60,000 x 1.9%) matched. If that person made the maximum contribution for 40 years, he would receive $9,000 a year, or $750 a month. CPP is paid on top of that.
Mitzie Hunter, Ontario’s associate minister of finance responsible for the ORPP, says we need it.
“We know people are not saving enough for retirement and we know that two-thirds don’t have a workplace pension,” she said in a recent interview. “We don’t want a generation of Ontarians to retire and not have enough to sustain themselves. That’s why we’re doing this.”
Lee says a better use of national resources is to eradicate senior poverty.
“It’s very doable,” he said. “Elder poverty overwhelmingly affects female elder-elders. Women in their 80s and 90s, born and raised in the Depression, who didn’t work outside their home and so didn’t get CPP.”
Since they tend to outlive their husbands, these seniors become poorer when their spouses die and the CPP survivor benefit drops to 60 per cent. He believes fixing that is as simple as increasing the benefit to 100 per cent for spouses without a CPP and increasing their OAS if their income is still below the poverty line.
Other members of Lee’s panel liked the Ontario plan, including Bernard Dussault, former chief actuary for the Canada Pension Plan. In a long career, Dussault oversaw the actuarial assumptions behind the CPP, OAS and five main federal public service unions, including the RCMP and Canadian Forces.
He believes the best way to improve public pensions is to expand the CPP. The investment and administrative machinery is there and it would also be national, rather than provincial, in scope.
Likewise, Paul Forestell, an actuary and senior partner with pension consultant Mercer, believes the ORPP will benefit young people.
“The ORPP won’t do anything for people over 45,” Forestell said. “It will do a lot for people in their 20s. That’s why I like it.”
I also like the ORPP because my kids will benefit. It’s a plan that forces them to save a little now, for a benefit later, much like the CPP. It’s a piece of a work-pension puzzle that is increasingly complicated. The ORPP will be managed and invested by professionals, keeping fees to a minimum. It will reduce some of the risk and stress many face managing their retirement funds.
I do agree that the mandatory component of the ORPP is wrong. The British equivalent of the Ontario plan called NEST auto enrols, but has an opt-out provision. Very few people withdraw given the choice. Those who do, are near retirement and would not receive a benefit or have adequate personal savings.
Lee’s plan to eradicate senior poverty is a worthy public policy goal. But so is a better retirement future. They don’t have to be mutually exclusive.