Why Ontario’s Retirement Pension Plan is a good idea
Big, new ideas are rarely received well. They get a rough ride because they challenge the status quo and the entrenched interests built up around keeping things as they are. They are easy to criticize because they are unknown and untried, so you have to have faith that they’ll work — faith being belief in the absence of facts.
Saskatchewan premier Tommy Douglas fought an election in 1960 on universal health care, a vicious campaign in which the North American medical establishment, led by the Canadian Medical Association, vilified the plan, ostracizing and isolating doctors who supported it. The CMA claimed people would not be able to choose their doctors; there might be compulsory abortion; provincial officials might have the power to commit people to mental hospitals. Douglas was re-elected and in 1962 the province survived a strike by doctors that broke opposition to the plan and led the way to very quick adoption of universal health care across Canada. It was a big idea whose time had come.
Ontario’s proposal for a pension plan to supplement the Canada Pension Plan is in many ways similar. Bay Street and the investment community don’t like it because money you save with a government plan is money you do not spend with them for which they are paid fees. The self-employed and small businesses don’t like it much either, because at first blush they might pay twice, as the proposal calls for matched spending by employers and employees, though details and exemptions have yet to be worked out.
Like universal health care in 1960, the Ontario Retirement Pension Plan (ORPP) is a plan without proof, so it can be criticized as impractical, too expensive, likely to fail, likely to offer poor returns, be open to political interference and so on. You have to have faith that it can work and be as efficient as the Canada Pension Plan, a model other countries turn to.
The reason the Ontario Liberals are introducing it is because many people aren’t saving enough for retirement because they can’t — or won’t — and company pension plans are disappearing.
Two-thirds of working Canadians do not have a company pension and just one in three Canadians has a Registered Retirement Savings Plan (RRSP). After half a century of tax breaks, 94 per cent of available RRSP space is unused, a pretty clear denunciation of voluntary saving.
The best way to get people to pay for their retirement is to make saving compulsory. Too many things get in the way of voluntary contributions. For many, the discipline of a reward 30 years down the road dims in comparison to day-to-day needs. Those with modest incomes don’t have anything to spare.
Forcing savings through payroll deduction is a good way to get around that — a little at a time that adds up through the power of compounding and prudent investment policies. A little at a time is the CPP model. While many people grumble about how much CPP they get, that’s a political decision. The fund itself is run by professionals and run well on our behalf.
The Ontario plan is aimed at middle-income earners and your kids, many of whom are entering the workforce now.
The plan would collect $3.5-billion a year and force up to three-million Ontarians to contribute 1.9 per cent of their annual earnings up to $90,000. A $90,000 earner would pay $137 a month into the plan and after 40 years get $1,068 a month. This would be on top of Canada Pension plan payments. The maximum CPP payment this year is $1,038.
Put those together with personal savings and it’s a pretty good base.
Contributions would begin in 2017 and be phased in and the money would go into a pool, managed at arm’s length from the legislature to keep it free of political interference. The size of the fund would keep costs low.
The program would be mandatory except for the self-employed and those already enrolled in workplace pension plans. Those in federally regulated industries, such as banking, would also be exempt.
It’s a bold and progressive step after long bouts of dithering by the federal government. It recognizes that Old Age Security (OAS) and CPP alone are not sufficient for middle-income earners to maintain a comparable standard of living in retirement.
Like all big ideas, there are pros and cons and lots to debate. The devil will be in the details and sorting out fairness issues as they relate to small businesses and the self-employed.
It’s not a perfect solution, but it’s a step forward. The one sure thing is if we don’t do something nothing will change.
Personal Finance Editor Adam Mayers is the personal-finance editor of the Toronto Star. This article appeared June 28.