In a nutshell
The Government of Canada has recently announced a call for “Consultations on a Voluntary Supplement to the Canada Pension Plan” . The deadline for inputs is September 10, 2015 and the contact information is provided in the link. If you are opinionated on this important subject, please do so before the indicated deadline.
My input, provided below, was submitted a couple of weeks ago (but received no acknowledgment as yet).
From: Peter Benedek
Sent: July-21-15 10:24 AM
Cc: ‘peter benedek’
Subject: Voluntary CPP Consultations
Dear Ms. Adam,
I am delighted to participate in the voluntary CPP consultation process.
Canada’s retirement income system is in need for reform in four key areas:
- Insufficient savings
- Corrosive effect of high cost investments during accumulation
- Lack of simple access to cost-effective decumulation strategies
- No protection of private sector earned pension benefits (deferred wages) even in trust-funded plans, when employer declares bankruptcy with an underfunded pension plan
A voluntary CPP can readily address the first three of the above, and can even contribute to the fourth area in need for reform by, for example, accepting lump sum transfers from private sector pension plans once a bankruptcy occurs.
While I address the voluntary CPP in more detail in my recent blog post entitled ‘Voluntary CPP’? It could be great! The devil is in the details , I am responding to the consultation questions specifically below.
Thank you for the opportunity to provide input to this matter of great urgency to Canadians.
Peter Benedek, CFA
Replies to Consultation Questions:
1. Do you believe a voluntary supplement to the CPP should be an option for Canadians to save for retirement? Is this something you would use to increase your retirement savings?
A voluntary supplement to the CPP has a great potential to address the pension (retirement income) reform need in Canada, and I would personally participate in such a program, subject to the specifics of its implementation
2. How could a voluntary supplement to the CPP be designed to facilitate participation of individuals who may be at risk of undersaving for their retirement?
A combination of ‘auto-enrolment’ and ‘save-more-tomorrow’ nudge could be added to all current CPP contributors to enhance their (and their employers’) required CPP contributions voluntarily. Extending such a voluntary CPP to homemakers/caregivers (and retirees) could create a relatively secure default mechanism to address the retirement income needs of this currently unaddressed segment of Canadians
3. How much flexibility should there be for individuals who choose to participate? For example, what are your views on locking-in funds for retirement and providing variability in the contribution rates?
Flexibility should be provided to start, stop, increase, decrease, make lump-sum contributions/withdrawals to the voluntary CPP, consistent with the type of vehicle used for investment (a default balanced fund in a tax-deferred, tax-free or taxable account) or traditional CPP-like annuity income (which can only be tapped as income in retirement)
4. How could a voluntary supplement to the CPP be designed to provide a secure stream of retirement income?
As described in ‘Voluntary CPP’? It could be great! The devil is in the details, there should be two options: (i) a default passively managed globally diversified balanced or target date fund, and/or (ii) a traditional CPP-like annuity vehicle
5. What retirement income options should be available upon retirement for savings accrued within a voluntary supplement to the CPP?
the passively managed globally diversified balanced or target date fund should have: systematic withdrawal option or a lump-sum traditional CPP purchase option at retirement
traditional CPP payout start (currently any time between age 60-70) should be enhanced to allow for the purchase age 65 of a true longevity annuity option which starts payout at age 85; (this longevity insurance options should also be made available to participants in 5 (i)
6. Should transfers between a voluntary supplement to the CPP and other retirement savings vehicles be permitted? If yes, should there be any limits?
Transfers to other retirement savings vehicles should be permitted, subject to the tax rules associated with the source/destination vehicles in question
7. While employers would not be required to contribute, what would be the appropriate role for employers?
Employers should encourage employees to participate. Employers should be allowed on a voluntary basis to contribute as well, consistent with tax rules
8. Who should be responsible for investing the contributions made to a voluntary supplement to the CPP?
The traditional CPP fund should continue to be managed by the CPPIB
The default passively managed fund should be managed by a separate CPPIB-like organization, independent of the CPPIB and the government.
The additional voluntary contributions should be managed as an overlay on the current CPPIB administrative infrastructure