Ontario’s Proposed Provincial Pension Plan – Does It Make Sense?
By Hank BulmashManagement Retirement Planning Staff Training & Motivation
In 2011, Kathleen Wynne started to promote the idea of an expanded Canada Pension Plan (CPP). The federal Conservative government totally rejected the concept. The Ontario Liberals responded by putting forward the idea of a made-in-Ontario pension. At first, most commentators considered this a bargaining ploy rather than a serious proposal. The federal Tories were not swayed – they simply hardened their opposition to the concept of CPP expansion. Then in her pre-election budget, Wynne put some real meat on the table. She announced that the Ontario government would go ahead with its own provincial plan.
After winning a majority, Wynne’s government reaffirmed its commitment to the idea, and it is now very likely that Ontario will have its own pension scheme. Under Wynne’s plan, workers will contribute 1.9 per cent of their income up to $90,000 and employers will contribute an equal amount. The plan will not cover self-employed people, workers in federally regulated industries such as banking, and those covered by workplace pension plans.
This means an employee earning $70,000 a year will pay about $1,250 into the Ontario plan. The employer will pay the same amount – so the worker will have set aside an
extra $2,500 a year. The Ontario government projects that after 40 years of work this extra annual savings will increase the pension benefits by about 80 per cent from $12,460 (for CPP alone) to $22,400. That is at the same time both a huge increase from the CPP base (as the Right has pointed out) and one that will not provide enough for a retiree to live on (as Lefties have noted).
THE ECONOMIC ARGUMENT
The federal Conservatives are strongly opposed to increasing CPP benefits although several provincial governments have expressed support for the idea. Polls taken in 2012 showed that many people were opposed to the plan. Many businesses also opposed the plan since it would increase salary costs.
The economic argument against the plan is that payroll taxes make employees more expensive and kill jobs. It leads businesses to shift labour out of the jurisdiction, or encourages the replacement of humans with machines. The Conservatives have used both arguments in their campaign literature. More ideologically, they also contend that the plan is an expansion of the liberal Nanny State – that treats citizens like children who have to be taken care of by the government. The Conservatives enjoy having the opportunity to remind us that citizens are adults who are perfectly capable of taking care of themselves.
The fact that many people objected to something like the Ontario pension in the polls is both instructive and complicated. There are many reasons that people oppose the plan. Some probably just think that the CPP should be expanded. Creating a whole new Ontario bureaucracy to reproduce something that already exists seems wasteful and expensive. Others do not like the idea of giving up two per cent of their income to a forced savings scheme.
Some must be annoyed that they have the chore of investing the money taken away and given to a provincial organization. Also, to be fair, it is not a typical human trait to defer spending now in order to save for the future. Most of us are grasshoppers, not ants – and we get pleasure from enjoying ourselves. This means spending. Not from self-denial, which means saving.
To return to the question: does the Ontario pension plan make sense? It does in several important ways. First it is a response to the fact that as we live longer, our retirement periods become longer. And as our retirements become longer, most of us will not be able to set aside enough money to support ourselves. That simply reflects the social experience of our species – we never have enough saved. That did not matter so much in the old days (meaning 20 years ago). Most people retired by 65 and passed away by 72. That is seven years of retirement supported by about 40 years of work (from 25 to 65).
Nowadays many of us do not really begin work until our early 30s. We may work until 67 or 68, but many of us will live until our 90s. That means we will have about 25 years of retirement supported by 38 years of work. As you can see, the shift in the ratio of retirement to work is enormous.
Under the old system the ratio was 40/7: 40 years of work and seven years of retirement. That meant that each year of retirement was supported by 5.7 years of work. Under our current circumstances it is something like 38/25, which means that each year of retirement is supported by only 1.5 years of work. That is a shocking change.
Although there are many reasonable arguments that oppose the Ontario pension, the big argument in favour is simply a recognition of what our situation has become in the last generation. Our population is older than ever, it is longer-lived than ever, and the private pension plans that were so generous for the post-World War II generation are history. What is there to do? Not much. But expanding the safety net is one thing that we can afford, and despite all the negatives it would be wrong to pass this opportunity by. <>Hank Bulmash, CPA, CA, MBA, TEP, is CEO of Bulmash Accounting Professional Corporation in Toronto, ON can be reached at firstname.lastname@example.org.
Private sector/public sector pensions in perspective
The numbers in the Summary Table: Registered pension plans (RPPs) and members, by type of plan and sector (Total public and private sectors)* from Statistics Canada tell an interesting story. From 2008-2012, it looks like the number of defined benefit plans and their members stayed very close to constant at about 11 000 plans and 4.4 million members. The private sector accounts for 11 000 plans and 1.5 million members in 2012 (down from 1.9 million in 2008). So the private sector has dropped 20 per cent in five years from 2008-12.
The public sector has 411 plans and three million members (up from 2.6 million in 2008). That is an increase of 15 per cent in five years. So two thirds of people covered by defined benefit plans work in the public sector and their numbers are still increasing. On the private side, the numbers are dropping and they only account for one-third of the people covered by DB plans. No one in the private sector who does not already have a defined benefit plan expects to have access to one in the future. Private companies are never going to take on that risk again. In the public sector, the story is completely different.
The sense that DB plans have already ended really applies to the opportunity for getting one if you do not already have one. Also, the number of defined contribution plans and the members covered in both the private and public sectors is small (about 800 000 members in the private sector). This means that most companies are leaving the retirement funding field all together when they leave DB plans.