What's the future of the CPP?

The Canada Pension Plan (and in Quebec, the almost identical Quebec Pension Plan) is often referred to as one of the three legs of retirement income — the leg that's labelled government programs. That's a category that includes Old Age Security and, for lower income seniors, the Guaranteed Income Supplement. The other two legs of that three-legged stool are company pension plans and private savings, which includes RRSPs. 

The problem is that those latter two legs are too small or non-existent for many people. Only a third of Canadians are covered by an employer-sponsored pension plan, and about the same percentage have no RRSP savings at all. The statistics show that even among the minority who contribute to RRSPs regularly, people are socking away far less than they could. The median value of an RRSP for workers 55 or older is just $60,000, which points to a monthly retirement income of as little as $250.

So, it comes as no surprise that the Canadian Institute of Actuaries estimates that two-thirds of Canadians who plan to retire in 2030 "may not be saving at the levels required to meet household expenses in retirement."

That explains why the pressure's on from a variety of corners to fill that gap by increasing CPP benefits. If fewer Canadians are working at jobs that provide a company pension and Canadians don't seem to be anywhere close to maxing out their RRSP contributions, perhaps we should boost CPP payouts to reflect that reality.

Of course, that sentiment is by no means unanimous. There's plenty of opposition to the idea of boosting CPP benefits — mainly because that would mean boosting mandatory contributions from employees and employers. Many of those opponents suggest a new program to cover the retirement savings gap — a privately run program called the Pooled Registered Pension Plan, or PRPP. More about that later. 

First, let's take a quick look at the CPP — its assets, its performance, its costs and what it provides:

Will the CPP be there for me?

As of the end of 2010, the CPP fund had just over $140 billion in it — making it one of the biggest pension funds in the world. With about half of its assets invested in equities, the fund took a hit in parts of 2008 and 2009 as stock markets tumbled. But as markets recovered, so did the CPP. At year-end 2010, the fund had a 10-year annualized rate of return of 5.6 per cent.

As for the future, the chief actuary of Canada reported in late 2010 that the CPP remains sustainable at current contribution rates for the next 75 years. "We remain confident that our investment strategy will deliver the returns required to help sustain the plan for decades and generations," the CPP Investment Board said.

In fact, current CPP contributions exceed payouts ($35.86 billion vs. $31.9 billion) — a situation that's likely to continue for another 10 years. Only then, as more Canadians draw benefits and comparatively fewer working Canadians are contributing, will the CPP have to start drawing on investment income to help pay pensions.

The bottom line from the chief actuary: the CPP will be there for you, your kids and your grandkids. For most private pension plans and RRSPs, there are no similar guarantees.     

The costs

The CPP is designed to replace a quarter of Canadians' pre-retirement earnings, up to a maximum that's adjusted every year.

For 2011, the annual maximum pensionable earnings figure is $48,300, with a basic exemption on contributions on the first $3,500 of income. So, contributions are based on no more than $44,800.

Employees and employers each contribute 4.95 per cent of that figure, or a maximum of $2,217.60 a year each.

Self-employed Canadians pay both shares — a total of 9.9 per cent of earnings — to a maximum of $4,435.20 yearly.

The benefits

Most people view the CPP as merely a source of retirement pension income. But it's also a source of modest death benefits — up to $2,500 — as well as survivor benefits for partners of CPP contributors who've died. It also provides disability benefits worth up to $1,153 a month and a benefit for children of disabled or deceased contributors of up to $218 a month.  

Currently, the maximum retirement benefit for someone retiring at age 65 is $960 a month, or $11,520 a year. But federal stats show that the average CPP retirement pension that Canadians actually received in late 2010 was just $504.50 a month — a little over $6,000 a year.

There are a few reasons for this shortfall. Many Canadians didn't earn anywhere near average wages during their working lives so didn't contribute anywhere near the maximum. Other workers might have contributed for just 10 or 20 years as they took time off from paid employment to raise a family.

Those lower-than-maximum payouts — which at best cover just 25 per cent of average pre-retirement earnings — have provided more ammunition for the "let's boost the CPP" movement.

The future

The idea of gradually boosting CPP payouts and premiums is supported by several provinces, seniors groups and unions. The Canadian Labour Congress is the main labour group spearheading the drive to double CPP payouts by 2050.

"The best way to help today's workers save enough for retirement is by increasing what everybody gets from the Canada and Quebec Pension Plans," the CLC says. "A modest increase in contributions today will produce thousands of dollars a year in extra benefits for workers when they retire."

By "modest," the CLC means an extra 0.43 per cent increase in contributions each year for the next seven years — a maximum of an extra $185 in the first year, rising to an extra $1,298 in seven years' time. 

The CLC says many workers who contribute to a company pension plan won't pay the full amount of that CPP increase because most workplace pensions are integrated with CPP benefits, so any increase in CPP premiums would be offset by lower payments to the workplace pension plan.

Employers, however, would enjoy no such premium offset. That accounts for a lot of the opposition.

The fight

The Canadian Federation of Independent Business, which represents more than 100,000 smaller businesses, says research it commissioned suggests the CLC's proposal to eventually double CPP benefits would be a job killer.

Ten years into its "full shock" scenario, a cumulative total of 1.2 million person-years of employment would be irretrievably lost, it says. The CFIB-sponsored analysis also says wages in the long run would be forced down by 2.5 per cent as people are forced to transfer current savings to the future.

"Putting more of today's earnings aside for tomorrow will put more of today's spending power aside as well," says the CFIB's chief economist, Ted Mallett.

The CFIB also refers to what it calls the "crowding-out effects" of increasing CPP premiums. "With such a large increase in mandatory CPP premiums, coupled with the indirect employment market impacts on earnings, employees would likely cut back on other forms of savings in order to soften the impacts on their current standards of living," says a CFIB policy paper. "It is quite likely they would reduce discretionary contributions into personal RRSPs, TFSAs, or in the purchases of other long-term assets."

The PRPP

Mention was made earlier in this story of PRPPs, or Pooled Registered Pension Plans. A federal framework policy paper sees PRPPs as "particularly beneficial to Canadians that do no have the benefit of an employer-sponsored pension plan, including the self-employed."

Employers would have to offer these privately run plans to their workers but would be under no obligation to contribute anything to them. Employees would be enrolled in the plans automatically but would have the option to opt out. In some respects, they would be similar to group RRSPs or defined contribution workplace pensions. But unlike the CPP, payouts from PRPPs would not be guaranteed or indexed to inflation.   

The PRPP isn't the only pension reform alternative. The Institute for Research on Public Policy, for one, has called the CLC's CPP proposal "rather blunt." Instead, it suggests the development of a second CPP tier that would apply to earnings over $25,000 and extend above the current ceiling. Unless someone specifically exercised their right to opt out, this second tier would automatically enroll all employees who didn't already belong to a qualifying workplace pension plan. 

At any rate, CPP reform of any sort seems to be off the political front burner. In December 2010, a majority of the country's finance ministers endorsed further study of PRPPs while nominally keeping alive the idea of an enhanced CPP. So, further CPP reform isn't completely dead; it's just not imminent.

"We're just not about to implement anything right now because of the economic circumstances," federal Finance Minister Jim Flaherty said in December 2010. "The plain fact is we don't have anything to implement right now because we have to do more work."

So, expect to hear much more about this issue in the months — and perhaps years — to come.