Ottawa, Ontario unite on pension reform

A pair of letters between the two ministers released Thursday outlined their positions, in which Flaherty suggests tax changes to encourage more voluntary savings, along with new private pension options for the self-employed, small businesses and those not covered by corporate plans.

He also advocates an incremental expansion of the CPP.

“I believe that we should consider a modest, phased-in and fully funded enhancement to defined benefits under the Canada Pension Plan in order to increase savings adequacy in the future,” Flaherty writes.

Enhanced benefits would be paid for by contributions and investment returns over a person’s working career, as opposed to the existing CPP that pays benefits from contributions made the same year. The current reserve fund managed by the Canada Pension Plan Investment Board will be used to cover some of the increased costs associated with the retirement of the boomer generation.

Duncan’s letter points out that the average CPP benefit is about $6,000 per year, with a maximum of $11,000 per year, lower than public employment-related pensions of most comparable countries. He would like to see improvements that are pre-funded, intergenerationally equitable and, most of all, affordable.

He also favours creating new options for companies and individuals to join large-scale private pension plans that would provide a more cost-efficient way to save more for retirement than individual savings plans.

Interesting turn
The ministers’ positions are somewhat surprising considering their remarks following their December meeting in Whitehorse, where both Flaherty and Duncan said nothing about the CPP and hinted only at an expanded role for the private sector.

Absent from the discussion is any mention of a voluntary, supplemental plan as championed by pension expert Keith Ambachtsheer and—until recently—the governments of B.C. and Alberta. Both provinces had been touting the creation of a regional supplemental plan as a solution in the absence of federal leadership on the issue. B.C. has since thrown its weight behind a federal solution, while Alberta has withdrawn all support for any government-related effort, and would prefer to give the private sector 10 years to improve the lot of retirees before revisiting the issue.

The chorus gets louder
The ministers’ letters topped off a week of dueling statements and reports from various stakeholders clamouring to be heard before the ministers’ meeting in Lakeside, P.E.I. on June 14.

The Association of Canadian Pension Management (ACPM) released a five-point plan on Thursday to improve retirement coverage, calling for the removal of barriers to group coverage, ensuring the viability of defined benefits (DB) plans, increased innovation, the promotion of simplicity in administration, and more incentives to save.

TD Economics released a report which warned of inadequate retirement income levels over the next 40 years unless pension reform is implemented. It concluded that Canadians earning between $30,000 and $80,000 are most “at risk” of not saving enough to maintain their current standard of living, and that workers should be allowed to contribute more to registered savings plans and tax-free savings accounts. It also called for improved financial literacy among Canadians and more efficient employer-sponsored DB plans.

Also, a BMO report called for raising or eliminating the age limit of 71 for contributions to RRSPs, while the Canadian Federation of Independent Business (CFIB) slammed the idea of doubling CPP premiums and benefits.

On Friday, the CFIB followed up their campaign, calling the ideas floated by Ministers Flaherty and Duncan “outrageous”.

“Small businesses in Canada are already bracing themselves for maximum allowable increases in Employment Insurance (EI) premiums for the next four years,” said CFIB president Catherine Swift, in a statement. “This is on top of potential hikes in workers compensation premiums in many jurisdictions and significant increases in minimum wages across Canada. Coming out of a recession, these huge increases in mandatory payroll taxes will take a big bite out of the payroll budgets of virtually every business in Canada. Shouldn’t ministers of finance be just as concerned about job creation as they are about retirement income?”

Meanwhile, Canadian Auto Workers union boss Ken Lewenza called the possible improvements “encouraging and historic,” and urged finance ministers from other provinces to support the changes to the CPP legislation.

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