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CPP changes are welcome start to real reforms

The federal government’s announcement it had reached a deal with eight provinces to increase Canada Pension Plan contributions and payouts met with the predictable doom and gloom from the usual suspects.

Predictions of an economic hit and job losses greet every such change. Often, the opposite is true, such as the gains that followed the last round of CPP reforms under Paul Martin.

The comments began even before federal Finance Minister Bill Morneau met Monday with his provincial counterparts. But what emerged from the sessions will have far more long-term benefit than any short-term pain, including higher contributions from workers. That in itself is enough to negate the critics, many of whom object on ideological grounds and, more to the point, because of vested interests in the financial services industry, which in this country charges some of the world’s highest administrative fees.

Those who stand to gain always argue that private savings are better, it maintains, because they offer more flexibility, including self-directed investing and the ability to cash-in early if the money is needed. Leaving aside the confirmation bias, the potential for riskier investments and the option of raiding the cookie jar, that position ignores the reality that the people most likely to depend on CPP are precisely those who can’t or won’t set aside money for their retirement years.

About two-thirds of Canadian workers don’t have a company pension plan. In fact, about a third don’t have any retirement savings at all – about 30 per cent of eligible workers didn’t contribute to an RRSP, for instance.

For those who have no savings of their own, relying only on government sources, retirement will be a meagre affair. Or simply put off altogether.

The CPP provides 25 per cent of a worker’s average annual earnings – hardly enough for a comfortable retirement, which is where programs like Old Age Security and the Guaranteed Income Supplement come into play.  The changes proposed this week would increase replacement levels to 33 per cent. The reforms proposed to go into effect in 2019 would see the average Canadian worker earning about $55,000 pay an additional $7 a month in 2019, increasing to $34 a month by 2023.

If fully rolled out, the maximum annual benefits will increase by about one-third to $17,478.

While not great – or even sufficient – it’s a good start for a program where the 25 per cent level has been consistent since CPP was introduced five decades ago. Payments for current recipients come partly from invested reserves and partly from contributions from today’s workforce. In order to ensure a more stable system and to provide a decent retirement income, we’ll have to start boosting CPP contributions.

Ideally, that 25 per cent figure would become 70 per cent, the figure most often cited as the level of income needed to preserve our standard of living in retirement.

Much higher contribution levels should have been ramped up years ago, but better today than not at all – that’s the rationale for Ontario’s proposal for a pension plan of its own. Now, as a bonus, Morneau’s plan would see the Wynne government scrap its plan, a win for Ontarians saddled with an incompetent crew at the helm.

As spending priorities go, there are few things more important than long-term financial security and the stability of a well-funded pension system. But long-term thinking – and the public good – is in short supply among those making decisions.

 

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