Expand CPP? Are you kidding? This is an idea that has been proposed by Jim Flaherty, federal finance minister. It’s an idea opposed by the province of Alberta, although I’m starting to suspect that Alberta would oppose anything that the federal government proposed. I’ve heard a rumour that there’s a single person at the ASC who accounts for this combative attitude, but I don’t personally know. Since I have taken the same position, I’d like to go through the benefits and drawbacks to show why this isn’t a great idea.
Expanding the CPP isn’t really a bad idea. I’m not convinced, however, that the premise is well founded. Every now and then, a report is written and gains attention, saying that Canadians aren’t saving enough to retire. This sounds a little alarmist (which rubs me the wrong way), but beyond that, I’m not sure the Canadians in question would agree. As an example, stop any 100 random Canadians on the street and ask them how much they need to retire. Then ask them if they will have enough. My guess is that over 75% will answer “I don’t know” to the first question (eliminating the need to ask the second) and of the other 25%, over half will answer “I don’t know.” Further, I’m not sure we can know how much we will need to retire. A lot changes over our lifetime, from kids being born, growing and leaving home, to moving house, changing mortgages and paying it off, to marrying, divorcing and remarrying. So how can an academic or practitioner decide how much money the average Canadian will need to retire?
Let’s assume, however, that Canadians aren’t saving enough for retirement. Let’s suppose that they aren’t saving anything and they’ll need to get by on CPP and OAS. Let’s suppose these people are married, one spouse worked to age 65 and they both qualify for full OAS benefits. Currently, they would receive almost $2000 per month. If they own their home, that would seem like a very adequate amount to live on. These reports seem to indicate that it’s not enough. The worst case, however, is not that these people will starve or freeze to death. They may not be able to upgrade their car or television every few years. They may not be able to eat at restaurants or travel. But they will survive. How many people in the entire world (and through history) have survived on less than $2000 per year?
I’m not convinced of the need for pension reform. People should be able to survive on existing government programs. But let’s suppose that there’s a political desire to do something. What would be the best way to make changes? An optional addition to CPP has been suggested. But research has shown that people often accept the default option, which in this case would be to NOT participate. Another option is to increase the percentage of earnings which must be contributed to CPP. This would increase benefits, but would affect everyone equally. This doesn’t address the situation where low-income workers may already receive adequate benefits. The option that seems to be favoured by the government is to increase the ceiling (yearly maximum pensionable earnings) above which contributions needn’t be made and benefits are not accrued. This would increase savings and benefits for middle-income earners, forcing them to increase their retirement income.
There is the question of governance. Because it’s tangential and somewhat cynical, I will suffice it to say that no one person or small group should have control over such a vast sum of resources as the CPP Investment Board has, never mind increasing their power.
If the government feels they must act, increasing the YMPE seems to be the most rational decision. However, few people enjoy being forced, even if it’s for their own good. And in this case, I don’t think the government is in a position to tell us how much is the right amount of retirement savings. It’s a decision that varies with one’s individual situation and desires and each person should make it for themselves. If one doesn’t choose to save, I feel that the current social safety net is adequate.