You’ve probably seen the television ad by now – the one that shows a man receiving a watch as a retirement gift, then pawning it at night, presumably because he’s strapped for cash.
The ad, sponsored by the Canadian Labour Congress, is part of what is becoming an emotional debate over a possible expansion of the Canada Pension Plan. The Liberals have vowed to enhance the CPP and federal officials will meet with provincial premiers in Vancouver on June 20-21 to see if they can agree on what has to be done.
Here’s one tip for all the deep thinkers who will convene in Vancouver: First, define the problem. Is the goal to help seniors living in poverty? Or is it to build a better retirement for the middle class?
Yes, our national retirement system could use some tinkering. However, it’s fantasy to insinuate, as the television ad does, that large numbers of working Canadians are doomed to poverty once they leave a job.
Canada’s retirement system consistently earns above-average grades from international comparisons such as the one compiled by benefits consultant Mercer. Thanks to building blocks put in place over the past half-century, poverty among seniors in Canada has faded to a small fraction of its level in the 1970s.
Contrary to popular belief, retirees are now less likely to be living in dire straits than working-age people. Only about one in 27 seniors has to subsist on a low income, compared with about one in nine non-seniors, according to a new report from the Fraser Institute.
To be sure, we should not be satisfied with any level of poverty. The elderly, in particular, often have little capacity to improve their economic situation and deserve special attention. However, the Fraser Institute study makes a strong case that simply expanding the CPP won’t help the most vulnerable retirees.
The report, by Charles Lammam, Hugh McIntyre and Milagros Palacios, shows that senior poverty is heavily concentrated among those who live alone. These low-income seniors are disproportionately women.
The group of people who are the most vulnerable of all are those with absolutely no CPP income. In 2013, nearly half of seniors with no CPP income lived in poverty, according to the report (click on image).
Here’s the rub: CPP benefits are typically based on how long a person has drawn a paycheque in Canada and how much money they have made. People with no CPP income in retirement are usually those with no history of paid employment, perhaps because they have been homemakers, perhaps because of health issues, perhaps for other reasons entirely.This is an excellent article which highlights a lot of key concerns on expanding the CPP but it falls short in one big area which I will discuss below.
Expanding CPP payouts won’t do much to help this group because they don’t qualify for benefits in the first place.
Even for seniors with a trickle of CPP income, an increase in benefits may not result in much increase in total income. That is because a more generous dollop of CPP money is likely to mean less money from other government sources.
Under current rules, an impoverished senior who collects a higher payout from the CPP would be penalized by receiving a lower stipend from the guaranteed income supplement for low-income seniors.
So what should CPP expansion aim for? The Fraser Institute report makes no suggestions. It gives the impression that any enhancement of the current system is probably unwise.
In contrast, many of us would like to see help for Canada’s most vulnerable retirees. The problem is that it’s difficult to see how this can be accomplished within the confines of the CPP system, which is tied to past employment income.
But perhaps that’s not the real problem at all. Much of the agitation for an expanded CPP comes from those who believe many middle-class Canadians will face a sharp drop in living standards once they quit work.
That is a far more tractable challenge. One simple way to address the middle-class gap would be for the CPP system to bump up its earnings ceiling.
At the moment, CPP contributions stop once your income hits $54,900. If the limit were increased to $100,000 or more, CPP payments in future could ratchet up to much higher levels.
Just don’t count on a big bump right away: The increased payouts would not be immediate. Extra contributions would take years to build up to a point where they delivered significantly higher payouts to future workers. And, yes, you would have to contribute more of your paycheque to make this happen.
The knotty realities of any reform suggest the upcoming CPP discussion in Vancouver will offer plenty of entertainment.
Those who attend will first have to address whether they want to help Canada’s most impoverished retirees or address the plight of the middle class. Either way, the potential solutions are likely to prove more difficult than television ads imply.
First, you can read the latest report from the Fraser Institute, Expanding the Canada Pension Plan Will Not Help Canada's Most Financially Vulnerable Seniors, by clicking here.
Here is the summary of this report:
Concerns about the adequacy of retirement income are mostly driven by a misplaced focus on middle (and sometimes upper) income Canadians not saving enough for retirement. The debate should be refocused on Canadian seniors who, because of their very low income, are financially vulnerable in retirement.Unlike previous reports from the Fraser Institute which I lambasted on my blog, this one is decent. However, I'm not particularly impressed because there is absolutely nothing new in this report.
According to Statistics Canada’s low-income cut-off, single seniors living alone are more likely than other seniors to experience financial difficulties. In 2013, 10.5% of single seniors living alone lived in low income, which is considerably higher than the rate for all seniors (3.7%). The group of low-income, single seniors is disproportionately made up of women.
A subset of single seniors is at even higher risk of low income, namely, single seniors with no income from the Canada Pension Plan (CPP). In 2013, nearly half (48.9%) of single seniors with no CPP income lived in low income.
Expanding the CPP is an ineffective way to help Canada’s most financially vulnerable seniors since many of them have a limited work history. Those who have not worked, or worked only a little outside the home, have made limited contributions to the CPP. Those contributions are a key determinant of the CPP retirement benefit, so expanding the CPP would do little or nothing to help Canadian seniors with a limited or no work history.
Even for low-income single seniors with a work history and sufficient CPP contributions to receive retirement benefits, expanding the CPP may provide little or no net increase in their total income. That’s because a higher CPP benefit could simply result in a reduction in government-provided benefits targeted at low income seniors, such as the Guaranteed Income Supplement.
In fact, policymakers know all too well that expanding the CPP won't benefit the poorest seniors which are disproportionately women who never contributed to the Canada Pension Plan.
In November 2013, I attended a conference in Ottawa sponsored by the University of Calgary's School of Public Policy and CIRANO. I wrote about it in a comment looking at whether Canada is on the right path.
The speakers at the conference included Jean Charest, the former Premier of Quebec who now works at McCarthy Tétrault and David Dodge, the former Governor the Bank of Canada. Also in attendance was also Henri-Paul Rousseau, the former President and CEO of the Caisse who now works at Power Corporation.
I wrote the following back then:
[...] the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here.
The two main conclusions of their paper are:Ok, so we know that expanding the CPP isn't the way to lift the poorest of poor seniors out of poverty and that it can actually harm them which is why any policy to expand the CPP should make sure it doesn't leave this vulnerable subset worse off.
1) CPP reform that expands coverage for lower earners can do them harm--it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).
2) An expansion of the CPP that simply expanded the year's maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.
Indeed, I would argue that you need to also expand the Guaranteed Income Supplement to cover the poorest seniors living on their own barely scraping by and you need to make sure these people are taken care of first and foremost.
But expanding the CPP was never meant to help the poorest seniors. It's chief goal is to help hard working Canadians with modest incomes save more for retirement so they can receive a safe, secure pension for the rest of their life precisely so they don't end up outliving their savings and are not condemned to pension poverty like many of these impoverished single seniors. This is why I continuously argue to ignore the critics and realize that Canadians are getting a great bang for their CPP buck.
The problem with all these discussions on expanding the CPP or introducing the ORPP is that Canadians are not properly informed on the success of our large well-governed public pensions and why expanding the CPP and bolstering defined-benefit plans in general is the right thing to do for our retirement system and the economy over the long run.
This is where I think the article above misses a crucial point. Expanding the CPP at a time when the Governor of the Bank of Canada has openly warned pensions (and retirees) to brace for the new normal of lower neutral interest rates (which effectively means prepare for lower returns ahead) is smart social and economic policy.
I mention this because Bill Gross came out with his monthly comment today, Bon Appetit!, where he basically explains why the next 40 years will look nothing like the past 40 years which he called a "black swan event" (I agree with Gerard MacDonell, please stop mentioning black swan too often, it's not a black swan, we're headed into a prolonged period of debt deflation and I would ignore silly economists and strategists who think deflation is dead. Make sure you have enough US nominal government bonds, the ultimate diversifier, to properly protect you in this environment).
All this to say please ignore the Fraser Institute or anyone who thinks that expanding the CPP or introducing the ORPP is a bad idea. They simply have an axe to grind and are not taking a holistic view on why such policies will vastly improve our retirement system and economy.
I leave you with some feedback on the article above from Bernard Dussault, Canada's former Chief Actuary and in my humble opinion, one of the leading experts on retirement policy in this country (added emphasis is mine):
Here are my comments on Ian McGugan ‘s article “Expanding CPP may not help most vulnerable retirees” published in today’s Globe and Mail.
Even if “Canada’s retirement system consistently earns above-average grades from international comparisons such as the one compiled by benefits consultant Mercer”, about 35% of Canadian seniors (i.e. 65 and over years of age) do receive Guaranteed Income Supplement (GIS) benefits. This means that in total these GIS beneficiaries earn annually between $14,000 and $20,000 approximately. Obviously this is not a decent income and while some of them earn above some defined poverty levels, all of them live in miserable conditions, not in dignity.I tell you, the one thing I love about my blog is I get to interact with extremely smart and classy people like Bernard Dussault. The man is a true Canadian treasure and you will never read comments like the one above in the Globe and Mail or National Post. It even opened my eyes to things I didn't understand completely (thank you Bernard).
Due the implementation of the CPP and QPP in 1966, the GIS utilization rate has gradually decreased from 56% in 1973 to about 35% in 2010. Without an expansion, the GIS utilisation rate is projected to plateau forever at the 35% level.
Unfortunately, most if not all proposals (except mine) currently envision a CPP expansion that would exclude from coverage at least the first $25,000 of annual employment earnings under for the following two reasons, which I counteract as follows.
- Low income earners do not have any savings margins. Nevertheless, I contend that although this would have always been the case, the CPP has been working well for them since 1966. An ultimate modest CPP expansion should accordingly well contribute to further reduce the 35% GIS utilization rate. Of the two main objectives of pension programs, i.e. alleviation of poverty and maintenance of living standards, the former should prevail. It must be kept in mind that individual income varies over one’s career and that accordingly the group of workers earning less than $25,000 in a given year is not the same as the ensuing year’s group. Moreover, irrespective of the CPP program, the Canadian and provincial government should consider as soon as possible gradually increasing the minimum hourly wage (about $10) to $15, not mainly because it would provide most Canadian workers with the savings ability to contribute to a modest CPP expansion but mainly because it would compel businesses to pay a decent minimum salary in consideration of the compelling nature of any job.
- Low income earners would not benefit from the expansion because their additional CPP benefits would be clawed back by the GIS. I contend that this is only partially true because few GIS benefits recipients have earned less than $25,000 a year in every of their working years until age 65. Besides, should the majority of Canadians not adopt more largely a CPP-related Confucius state if mind (i.e. the CPP compels you to fish rather than beg for fish) as opposed to strictly GIS-related Robin Hood one (i.e. there will always be a need for wealth transfers from the richest to the poorest individuals but this should be limited to some extent).
Most Canadians don't get it. Even informed Canadians are skeptical about expanding the CPP and I can't blame them. They read garbage in national newspapers from clueless journalists or even good journalists which cite flimsy reports from grossly biased think tanks and they think they're properly informed when clearly they're not. They are being misinformed or partially informed on critical public policy issues.
I hope this comment helps many of you, including experts in the field, understand why it's critical to expand the CPP once and for all.
What else? Many Canadians aren't aware of this but every two years, the CPPIB holds public meetings across the country, in accordance with legislative requirements. The next one is on June 6, 2016 and you can find out more details as to where to attend here.
Below, Rob Carrick of the Globe and Mail talks to CPPIB's outgoing CEO Mark Wiseman about why CPPIB’s investments look nothing like your RRSPs. Listen carefully to Mark's comments and make sure you read my comment covering CPPIB's Fiscal 2016 results.
Get informed, you'll understand why despite its critics, CPPIB is doing a great job managing the assets of the Canada Pension Plan, which is why our politicians need to finally step up to the plate and enhance the CPP once and for all.