By Elias Weiss.
Featured image via Darryl Dyck, CP.
A ‘historic agreement’ was reached last week by the federal government with support from eight out of the ten provinces. The goal? To implement a ‘modest’ expansion of the Canadian Pension Plan (CPP). Changes to the CPP require support from two-thirds of provinces, representing two-thirds of the population – a steep threshold.
But as ‘historic’ as it may be, this is not the first time changes have been made to the CPP since it came into effect in 1966. In the mid-1990s, faced with a looming pension crisis, some important adjustments were made to the CPP which included a significant increase in contributions (from 3.6% to 9.9%). This time around it was not a pension crisis, but another set of challenges that, according to the federal government as well as a majority of provincial governments, necessitated this new hike in premiums (from 9,9% to 11.9%).
The increases will be phased in over five years starting 2019. This essentially means working Canadians are going to contribute more, to get back more when they retire. It’s important to note Canadians currently retired or planning to retire soon won’t benefit from the expanded CPP, rather, this change concerns first and foremost younger (and future) generations of workers.
But what is the Canadian Pension plan, exactly?
The CPP is one of three pillars of the Canadian retirement income system and it’s one of the two building blocks of the Canadian public retirement system, along with the universal government benefits for seniors:
- The first pillar includes the Universal Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The OAS is the largest public pension program in the country. Canadians do not pay directly into it; rather, it’s funded out of the government’s general revenue, as is the GIS. Unlike the OAS, however, the GIS is not universal; it targets low-income Canadians over the age of 65.
- The second pillar (CPP) is not funded out of the government’s general revenue. In fact, almost all Canadians contribute to it. Both employees and employers make equal contributions (as it stands today, 4.95% each) – self-employed Canadians pay the full 9.9%. Its goal is to provide Canadians and their families with a partial replacement for their earnings in the case of retirement, death or disability.
- The third pillar – which is not part of the Canadian public retirement system, but part of the overall Canadian retirement income system – is entirely voluntary. It includes Employment Pension Plans and Individual Retirement Savings (plans either sponsored by employers or unions) and Registered Retirement Savings Plans (RRSPs) as well as Registered Retirement Income Funds (RRIFs), which are essentially savings accounts privately managed.
This new CPP expansion mostly concerns the third pillar. Indeed, it’s become apparent middle-income Canadians are not saving enough for their retirement – driving this phenomenon are a myriad of causes, one of which is the rapid disappearance of workplace pensions. In 1977, 43% of Canadians were covered; this number fell to 27% and 24% in 2002 and 2012 respectively – a downward trend likely to continue, unfortunately. Only complicating matters is the emergence of a ‘sharing economy’ which has disrupted the traditional, linear career path of yesteryear.
Gone are the days when employees and employers benefited from a career-long relationship that came with well-defined job-associated pensions and benefits.
Younger Canadians are more likely to have multiple jobs, and even careers, in their lifetime. New classes of workers are emerging, relying more and more on precarious contract work as their primary source of income. In light of this, expanding the CPP makes a lot of sense: no matter where you move within Canada, or how many times you change jobs, the CPP follows you everywhere.
We’re seeing governments more and more often faced with the challenge of adapting their social security models in order to respond to the needs of the new ‘normal’ for workers. Granted, the CPP expansion is not a cure-all but it fills a gap needed to be filled, and for that it is a welcomed good ‘first step’ for young workers.
Of course, not everyone agrees. Proponents of ‘personal financial responsibility,’ in emphasizing the important role individuals play in planning their own financial security, reject the CPP’s appeal to begin with, so some criticism they’ve leveled – especially those concerning the prospect of expanding the program – comes as no surprise.
Their thinking is: why should the government force its own citizens to sacrifice a portion of their income now to save more for later?
The answer seems pretty simple, however: if people do not save enough, we as a collective, end up paying for it with our ‘hard-earned taxpayers money’ through the Guaranteed Income Supplement (GIS). Still, this practical argument might not win over people ideologically opposed to what they consider a fundamentally paternalistic policy.
Conservative MP and Official Opposition finance critic Lisa Raitt made a similar argument during a Twitter exchange before the CPP announcement. “I know you don’t believe Canadians know how to handle money *beer and popcorn*,” she scoffs, referencing an infamous gaffe from the Paul Martin days, “but I have faith.”
That’s the spin, it may even be good spin. Indeed, what good self-respecting politician in his or her right mind (sauf Scott Ried) would dare say the opposite-?
Of course, it follows then, Canadians are always right and wonderful and rational … sunshine and lollypops… yada yada yada – case closed. Except we aren’t really rational. Or not at least, not economically rational that is.
A swath of empirical findings in the field of behavioural economics suggests people often make suboptimal economic decision for a wide range of reasons: incomplete information and an inability to properly process said information; biases; a reliance on anecdotal evidence; a lack of self-control and love for procrastination etc. Point is, Canadians may have good intentions, but it doesn’t necessarily translate into concrete results.
Believing in the principle of personal responsibility is in its purest form, a great ideological stance that panders to the electorate. “The customer is always right,” says the wily sales manager, fake smile in tow, or so the lie goes. But, good policy ought to rely on evidence, rather than how best to stroke the egos of Canadian voters.
The evidence, far from championing a rosy picture of private retirement savings, points to the fact individuals do not necessarily act in their best long-term economic interests. This financial mismanagement without a proper government response could cost us dearly at great expense to the public purse.
Elias Weiss studies Neuroscience and Biotechnology at McGill University. A liberal and a passionate believer in evidence-based decision-making, Elias hails from British Columbia but is now a proud Montréaler.
Follow him at Twitter at @eligdeon.