TORONTO- The pension crisis has sparked calls for a universal pension plan to cover Canadian workers without employer-sponsored pensions.First of all, there's something wrong with the math. If it takes a contribution of 9.9% (employee and employer combined) to raise funds for a pension that amounts to meager 25% of the income - then what do you think should be the contribution if we want to nearly triple the payout?
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Susan Eng, CARP's vice-president for advocacy, presented details of a proposed mandatory extension to the Canada Pension Plan to the House of Commons standing committee on finance Tuesday. She also unveiled details of a CARP survey that found 88 per cent of its members support the idea.
The UPP being proposed resembles the ``Canada supplementary pension plan'' (CSPP), suggested last May by the C.D. Howe Institute and Keith Ambachtsheer, director of the Rotman International Centre for Pension Management.
One key difference in the CARP proposal is that Eng thinks UPP should be mandatory, while Ambachtsheer contends the CSPP should have an "opt-out" provision for employees.
"If you're going to be a true paternalistic libertarian, you have to give people a chance to get out of something that may be good for them," Ambachtsheer said.
Eng disagrees, saying that to get the economies of scale necessary to cut costs, such a plan needs to be mandatory.
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While CPP pays 25 per cent of the maximum pensionable earnings of $46,300 in 2009, UPP would eventually replace 70 per cent of income from one's working years.
That would not come without cost. The current 9.9 per cent combined employer/ employee contribution rate would have to double to 20 per cent.
That's right, doubling the contribution won't be enough. 20% contribution will only buy you a 50.5% pension. To make it 70%, the contribution must be 27.72%. 13.86% for the employee, 13.86% for the employer, or both amounts at once (an extra $172.80 per thousand) if you're self-employed. No wonder the proponents of this scheme assume that unless the UPP is made mandatory, there will be so few people joining that the administrative costs alone could bankrupt the plan.
And another thing: remember what the CPP contributions used to be once? Even if you're not old enough to remember the days (1966-1986) when CPP contribution rate for employees stood at 1.8% (3.6% employee and employer combined,) you probably still remember that the employee rate was "only" 2.8% in 1996, from which it grew to 3% - in 1997, to 3.2% - in 1998 and so forth, until it reached the current 4.95% for employees and employers (9.9% combined rate for the self-employed) in 2003. I bet, not many could see that coming back in 1966. Now we have a proposal for a pension plan with the 10-14% contributions to begin with. Can anyone still be 100% sure that those rates will never go up?
Well, here's a better solution: Instead of instituting yet another mammoth pension plan - how about leaving it up to the people to manage their retirement savings, using personal savings accounts?
The CHP would move to a Personal Security Account (PSA) as was proposed by Dr. Robert Thomson back in 1980.Sounds much better idea for me, than having to contribute almost 14% of the paycheck (plus almost 28% of whatever self-employment income I may have) in a faint hope to receive 70% - when pigs fly and when lobsters whistle.
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Beginning with their first job, individuals and their employers would each contribute 5% to their PSA, just as we do now for EI and CPP, and in Ontario, Healthcare. This money is saved in an account that specifically belongs to that individual. When needed, the individual may withdraw needed funds from their account.
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Those newly unemployed would be able to withdraw up to a maximum of 15% per year from their PSA, after which, government assistance would kick in and provide support if it were needed.
This plan would ensure that, during times of crisis, people have immediate access to funds to tide them over. The withdrawal of 15% per annum in any time of need would not significantly affect the balance in the account, with 85% always remaining.
An added benefit of this policy would be to decrease abuse of the system, since individuals would be responsible to self-insure themselves up to 15% of their PSA. Building safeguards against abuse is an obvious necessity of any government assistance program.
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It is good to have non-experts listening to the avalanche of current public discussions on the pension crisis and proposed solutions thereto. It is hoped they will listen to the proper answers to the questions they raise and to the clarifications that some of their statements require.
The CPP was implemented on a quasi pay-as-you-go (paygo) basis rather than a fully funded basis. With the paygo approach, contributions for a given year are essentially equal to the benefits paid during that year. Therefore, paygo contribution rates are lower in the early years following implementation but increase gradually as the plan matures. Ultimately, the paygo rate is higher than the full cost rate because with advance funding, investment earnings help reducing future costs.
If the CPP had been implemented on a full funding basis in the first instance, the contribution rate would then have been 6% (3% employees, 3% employers). And it would still be 6% to day if it were not for the 1998 reform that reduced benefits by about 9%. The CPP full cost rate, as conveyed in the CPP statutory actuarial reports, is 5.4% (i.e. 91% of 6%).
To expand the CPP benefit rate from 25% to 70%, the extra 45% benefit rate would therefore cost 9.9%, i.e. (70-25) divided by 25, times 5.5%.
CARP'S proposed expansion of the CPP is quite different from Keith Ambachtsheer's proposed CSPP, which is a Defined Contribution (DC) Plan as opposed to a Defined Benefit plan (DB). The CSPP would not be administered though the existing CPP and would cost more than the CPP because its investments would be made in less risky areas and under each individual contributor's control.
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