The announcement that the federal government is going to study the option of allowing Canadians to voluntarily contribute to the CPP to supplement their retirement savings has supplied a lot of grist for my mill.
I have reviewed the somewhat thin media reports on the announcement and have the following comments to share with readers:
1. In the House of Commons on May 25, Minister of State for Finance Kevin Sorenson said, “Under our government, there will be no mandatory job-killing and economy-destabilizing pension tax hike for employees or, certainly, for employers.” Does this mean that the Minister of Finance Joe Oliver , with Wednesday’s announcement, is considering the proposal of a voluntary pension tax hike for Canadians? (bold emphasis added) A voluntary pension tax benefit would be much more attractive.
Read: Ottawa considers voluntary CPP expansion
2. There is huge devilry in the details of such a proposal, none of which were suggested in the announcement. Will voluntary CPP contributions translate into:
- i. additional fixed (or DB) monthly pension amounts, or
- ii. will they simply be invested by the CPP Investment Board and accumulate returns according to the performance of the CPP fund?
3. If 2(i) were to apply, it will be very difficult for the government to illustrate a value proposition that would beat out the Canadian insurance industry without having such benefits subsidized in some fashion (e.g., by taxes paid or CPP contributions made by those who choose not to voluntarily contribute)—this would obviously be extremely problematic for both practical and political reasons. Furthermore, there can be no doubt that the extremely effective and influential insurance industry lobby will be happy to make this point to Canadians.
Read: Proposed voluntary CPP expansion gets negative reaction
4. If 2(ii) were to apply, the value proposition will still be difficult to promote. Will the CPP fund be required to issue a prospectus to potential investors? Will the management expense ratio (MER) be as low as Canadians now believe? Last time I looked a couple of years ago it was more than 0.40% per annum, excluding the cost of administration of the CPP itself (not cheap, relatively speaking). A 0.40% MER is certainly is much cheaper than most mutual funds, but will certainly have to increase considerably to recover the costs of implementing and maintaining a whole new administrative infrastructure to provide a voluntary retirement investment solution. I expect the whole of Canada’s financial services industry would watch this closely and find ways to aggressively and effectively compete with the federal government on cost.
5. How easy will it be for Canadians to withdraw funds for purposes other than retirement savings? If it will be easy, this will add to administrative costs. If it’s not easy, take-up rates will be quite low as it’s my experience that most Canadians loathe government restrictions on access to their retirement nest eggs.
6. Would voluntary CPP contributions be tax deductible, and if so, would they reduce RRSP contribution room?
Read: The great CPP debate: Expanding the CPP is a golden opportunity
I have to conclude that this announcement is electioneering, with very little real substance. Are the Conservatives really seriously proposing to compete with Canada’s financial service industry in providing a CPP voluntary retirement savings alternative to add to RRSPs, TFSAs and PRPPs?
The whole point of the PRPP was to head off calls for CPP expansion/enhancement. I strongly doubt that this idea can possibly withstand the political pressure that would come to bear from the perception of a betrayal this announcement will spark in financial services industry. The Ontario Liberals have set the stage with the Ontario Retirement Pension Plan for a spirited pension debate about the CPP in the upcoming federal election. The Conservatives are the first to set sail on this debate, but under their deceptively bright spinnaker they are sitting in a very leaky boat.