It's Time to Expand the Canada Pension Plan
Oct 28, 2010
Most people are well aware that Canada is facing a retirement income challenge as more and more Canadians are about to enter their retirement years without adequate income security.
This being the case, Canada’s retirement income system has attracted widespread attention of late. Different parties with different perspectives and agendas have advanced a variety of proposals for both incremental improvements to the system and for a major expansion of the Canadian Pension Plan (CPP) as well.
In a newly-released study, Jonathan R. Kesselman of the School of Public Policy at the University of Calgary reviewed in depth what he refers to as “Big CPP” reform options. Some of these have been proposed by groups such as the Canadian Labour Congress and the Canadian Association of Retired persons, to name but a few.
Proposals for the expansion of the CPP are certainly not new. They were examined and favorably assessed as far back as 1979. And although some would view such a change as a radical reform for Canada, a Big CPP would, according to Kesselman, merely approach policies long established in many other countries.
Kesselman’s analysis and review of alternative proposals for reforming the retirement income system strongly support some form of Big CPP option. As he states, “Mandatory and universal coverage with higher benefit rates than the current CPP are essential to ensure benefit adequacy for all Canadians.”
The main cost in pursuing such an option is the reduction in individual flexibility and choices concerning savings. The larger the increase in benefits under an expanded CPP and the fewer the choices for opting out of the scheme, the greater would be the less of flexibility.
However, the good news is that while individual choice is attractive in principle, “in practice a significant proportion of Canadian workers are making poor choices in both savings and investment decisions that do not serve their own longer-term best interests.”
While a significant and growing proportion of retirees has inadequate income from all sources to sustain their accustomed living standards, the majority of Canadians nonetheless enter retirement with adequate resources. Some might wonder then if expanding CPP benefits might force people to oversave.
Except for individuals with the lowest lifetime earnings, this outcome “is unlikely to be common.” Adjustments for the expanded CPP would be made in the form of reduced workplace pensions, for example. As Kesselman concludes, the additional CPP benefits would be superior to their displaced counterparts in workplace pensions and individual savings. This comes from greater security and diversification, lower investment costs, lower annuitization costs, improved work and mobility incentives, and better inflation indexation. Moreover, “the enlarged savings via the CPP would not require individual expertise or resources to manage the associated investments.”
Most recently, NUPGE has again called for an expansion of the CPP. As James Clancy argues, the CPP is an important tie that binds us together as a nation. It is an expression of our collective commitment to one another and to the fundamental principle that all citizens have the right to income security and dignity.
It’s time for us to take advantage of the opportunity that exists today and call on our political leaders across the country to embrace this important and necessary step towards improving retirement security for all Canadians.
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