As we emerge from the financial crisis, a new and welcome debate is beginning about how we stabilize and strengthen our pension system. The financial crisis provided a rude (and in some cases surprising) reminder to many retirees (and near retirees) that their private pensions are far from secure. Many took a beating on their RRSPs, and even those with what they thought were defined benefit workplace pension plans (only about one quarter of workers) have discovered that these plans aren’t always a sure thing (witness the Nortel workers and others).
All of which has people looking with fresh eyes at the public pension system — Old Age Security, the Guaranteed Income Supplement, and the Canada Pension Plan. Turns out the least sexy plans are the ones you can count on. The problem, of course, is that the benefits these plans pay out are far too low to provide a reasonable retirement income. Even the CPP (the most “generous” of these plans) provides a maximum annual income of only about $11,000.
So, rather than beating a path back to the private plans, pension reform should emphasize strengthening the OAS, GIS and CPP. The CCPA’s annual Alternative Federal Budget has long called for increasing the OAS/GIS to ensure all seniors are above the poverty line (last year’s AFB called for a 15% increase to the GIS), and for significant enhancements to the CPP. Similarly, the Canadian Labour Congress is proposing substantial improvements to the public pension system, including a doubling of CPP benefits (see here for more).
Consider this: the CPP currently collects premiums from workers (payroll taxes) at a rate of about 5% of their pay (with the first $3,000 of earnings exempt), but only up to a yearly income of about $45,000, after which point a worker ceases to pay the CPP payroll tax. What this means, in practice, is that someone earning twice this amount ($90,000/year) is actually being charged an effective payroll tax of about 2.4% of their income, and a very wealthy person making $180,000 is paying an effective CPP payroll tax of 1.18% (while someone earning $45,000 or less is paying the tax at the full rate of about 4.7%). It is thus a very regressive tax.
In contrast, in the US, their equivalent Social Security payroll tax is similar to ours (4.75% of earnings), but this is charged on income up to a much, much higher ceiling — an annual income of $106,800. Thus, their premium rate, like ours, is regressive, but much less so.
Imagine how much more revenues we could collect for the stand-along CPP fund if our maximum ceiling was equivalent to the one in the US. And think about how much more generous CPP benefits paid to retirees could be if we went this route.