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Retirement security: debunking Andrew Coyne's case for the pension status quo

As the proposal to expand the Canada Pension Plan (CPP) wins more and more support, the opposition from the right-wing becomes increasingly shrill. Andrew Coyne's column today is a case in point and deserves a point by point response.

A bigger CPP doesn't help the poor

Coyne says that poverty among the elderly is at low levels, and a bigger CPP wouldn't help. But it is forgotten that the Guaranteed Income Supplement (GIS) plus Old Age Security (OAS) provides a meagre, bare bones guaranteed income for the many Canadians who lack enough retirement savings.

The maximum is just $16,704 per year for a single person, below the poverty line in a bigger city, and fully one third of all seniors qualify for some GIS.

The claim is often made that there is no pension problem for very low income earners because OAS and GIS replace a large share of pre-retirement earnings. Sure, the maximum GIS is a significant percentage of very low earnings of, say, $20,000 per year. But a high “replacement rate” is still not enough to pay rent and put food on the table.

Finally, we often hear that many low income earners would have to pay higher CPP premiums under the expansion plan, but would not benefit since their future CPP benefits would just reduce their eligibility for the GIS in retirement.

But we do not know in advance who will move up and down the earnings scale over a working lifetime. And the provincial proposal for a bigger CPP would not require extra CPP contributions in any year in which a worker has earnings of less than $25,000.

Canadians are saving enough

Coyne claims that only a relatively small group of higher income Canadians have not saved enough to maintain a reasonable standard of living in retirement. But he looks at today's seniors, while experts like Michael Wolfson, former Assistant Chief Statistician at Statistics Canada project forward and estimate that a hefty proportion of those who will follow the baby-boomers into retirement will be in big trouble.

The fundamental problem is clear. Unlike the past, only about one in five private sector workers today have access to a traditional defined benefit plan which will provide a decent pension based on previous earnings.

For them, the CPP is a god-send since it will pay out a pension for life, fully indexed to inflation, which will replace earnings from any job held over a working lifetime.

The only real problem with the CPP is that it replaces only 25% of earnings, up to a maximum of just $12,000 per year. And the average CPP pension is much less, just $603 per month.

RRSPs are working fine

Coyne suggests that, instead of expanding CPP, we could just encourage or require individuals to save more through RRSPs. But very few people contribute to RRSPs to anywhere near the maximum amount, and there are huge built in flaws with individual savings plans.

RRSPs are high cost (many mutual funds charge 2-3% per year in management fees); there is no risk sharing with a group, so an individual who wants retirement security must save as if they will live to a ripe old age; and individuals cannot hope to beat the returns of large, diversified, well-managed pension plans like the CPP Investment Fund.

To cap it off, most employers do not help individuals save through RRSPs, whereas CPP premiums are evenly divided between workers and employers.

Higher CPP premiums will kill jobs

While it has been a key debating point for the Harper government, Coyne concedes that the modest increase in CPP premiums needed to improve benefits significantly (about 1.5% of payroll costs for employers) would have little impact on jobs. The required premium increase would be phased in over several years.

You can't trust the CPP

Coyne doesn't think your money is safe with the CPP. But there are strict rules set out in legislation.

Major changes to the plan can only be made with the agreement of seven provinces with at least 50% of the population, meaning that a very broad consensus must be achieved. The CPP Investment Fund is run completely independently of governments and has achieved very healthy returns at a very low cost. Sure, premiums and benefits may have to be adjusted down the road, but that is true of any pension plan.

Individual choice is important

Coyne and many others on the right object to the CPP being a compulsory program, forcing individuals to save. Fair enough, to a point. But the same is true of any traditional workplace defined benefit pension plan. Everybody pays in, and everyone benefits.

It boils down to this: we are better off working together for retirement security rather than leaving everybody to manage things on their own.

Photo: Chris Potter. Used under a Creative Commons BY-2.0 licence.