Expanded CPP is dead? Long live pension reform!?!

 In a nutshell

The expanded CPP appears dead, for now anyways; this time killed by the federal government. With apparent consensus on the need for pension reform, over the past few years the possibility of an expanded CPP sucked all the oxygen out of the debate on the best type of pension reform for Canada. Perhaps some of the other good ideas for pension reform will get an airing again, as some of the provinces are planning to go ahead with pension reform alone or together, without the federal government. With fewer jurisdictions having to agree whether and how to proceed, perhaps the process will actually get under way.

The details

The CBC’s “CPP reform stalled as finance ministers fail to reach consensus” reports that “Ottawa blocked a consensus on Canada pension Plan reform” because according to Mr. Flaherty “the economy is too fragile” and “Now is not a time for CPP payroll tax increases”.  In The Globe and Mail’s “With no consensus on CPP reform, Ontario pledges to go its own way” Curry and Morrow report that PEI finance minister indicated that “A made-in-Ontario solution may involve every province of Canada.” And sure enough BenefitsCanada reports in “Ontario to move forward with provincial pension plan” that Ontario Finance Minister Charles Sousa indicated that “Given today’s unfortunate stall tactic by the federal government, we will move forward to implement a made-in-Ontario alternative to protect Ontario workers in their retirement… Doing nothing is not a solution to this problem and will not give Ontarians the security they need to retire”. Also, past week, Quebec announced an action plan which includes, according to the latest Blakes pension bulletin, “Studying the proposal…to create a longevity annuity that would offer a DB annuity to all Quebec workers starting at the age of 75.”

What is so disappointing is not just that they couldn’t agree on expanding the CPP, but that they did not deliver any pension reform after at least 7 years of intense studies and regular federal/provincial meetings on the subject. The best the federal government could do is insisting on its commitment to the deservedly derided PRPP.

The ball is now in the court of the provinces, and some of the provinces, at least Ontario, are committed to action. Whether they’ll proceed with pension reform alone or together, with a CPP-like expansion or some different mechanism, the problems are well understood and the solutions are not that complicated. Now that the federal government has effectively killed an expanded-CPP for an indeterminate period, there are many other good pension reform ideas that might deliver potentially superior outcomes.

The problems are well understood and Canada’s pension system is broken. Some parts work, but most parts need urgent repair and other parts are in systemic failure. The problems in simplest terms are: (1) insufficient savings, (2) the corrosive effects of the high cost of investments during accumulation, (3) lack of simple access to cost-effective decumulation strategies and no access to cost-effective longevity risk mitigation vehicles, and (4) no protection of earned pension benefits (deferred wages) even in trust-funded plans when employer declares bankruptcy with an underfunded pension plan.

The solutions are not complex: (1) payroll-based voluntary and/or mandatory, employer and/or employee contributions, with default “auto-enrolment” and “save more tomorrow” commitment, (2) low-cost default investment vehicles for accumulation, (3) low-cost systematic withdrawal plans with optional pure longevity insurance for longevity risk management, and (4) increased priority for trust-funded pension plan deficiency when employer becomes bankrupt.

Bottom line

It is time to stop procrastinating and obstructing pension reform. Don’t just stand there, do something; almost anything is better than the status quo. Only the powerful financial industry benefits from the status quo. Perhaps that explains why nothing is being done?!?

P.S. For those of you who are interested in further reading on the subject, over the past seven years I have written 31 blog posts on Pension Reform (31) and 15 on the Nortel Pension (15) disaster. Many pension experts’ proposals were also referenced in these blog posts.

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