Home » Canada » Are the Winds of Change Blowing Across Canada’s Pension Plan?

Are the Winds of Change Blowing Across Canada’s Pension Plan?

by John Brian Shannon | June 2, 2016

Canada Flag made with red maple leaves on snow1

Canada Flag made with red maple leaves on snow.

The Canada Pension Plan (CPP) is at a unique point in its history. Mandatory for all Canadians, the CPP allows working Canadians to retire with a minimum income in addition to their company pensions, life savings and real estate equity.

The plan itself is in good financial shape due to sound institutional investing over many decades and it presently earns 1.1% more than it needs in order to meet all foreseen liabilities.

But that could change.

A severe recession could drive the plan into negative territory, necessitating a rise in the premiums that workers and employers pay — without making any changes to the benefits that retirees receive from the Canadian Pension Plan.

Alternatively, during a severe recession the government could simply lower the monthly benefit payment by a fractional amount in order to keep the CPP fully-funded — without making any changes to the premiums that workers and employers pay to fund the Canadian Pension Plan.

So, with a bit of wind in the sails (but not that much) why are we looking at possible changes to the CPP?

1) There is a minor political suggestion to take advantage of the 1 percent profit the plan presently generates and lower CPP premiums by some fraction. It looks like honest stewardship of public accounts on the part of the government.

However, by reducing worker and employer contributions the plan could soon find itself in jeopardy during an economic downturn and at the worst possible moment for Canadian workers and business it would need to raise premiums to meet future liabilities.

It’s a nice idea and if the investment was generating 10 percent or 20 percent more than its expected future liabilities, it might be worth a look. But it’s not. So let’s file that suggestion until such times as the CPP investment pool is earning outrageous profit and workers demand lower premiums.

2) Another suggestion that has been floated, and that is to slightly increase CPP premiums in order to increase the monthly benefit (the payment) which is paid to Canada’s senior citizens. In such cases, the benefit would increase after a minimum 3-year delay in order to ‘build-up’ enough capital to cover the increased benefit amount.

Which is a tempting idea, actually. The costs of living anywhere, but especially in cities like Vancouver, Toronto and Montreal are skyrocketing, and senior citizens who live on a fixed income might find that an extra $100. per month (for example) can make the difference between eating well and paying for their herbal supplements, walkers, or other health-based assists that may be helping them, or not being able to afford them.

As the cost of living continues to rise over the decades, shouldn’t we at least think about increasing the CPP premiums by 1 percent that workers and employers pay? After all, eventually every one of us will retire and some or much of our retirement income may come from CPP.

Those retirees without company pensions, significant savings or real estate holdings, would really benefit from the extra monthly benefit amount, while those who are financially well-off may reject the idea that they should pay an extra 1 percent towards their CPP payroll deductions during their working years.

It’s an absolute no-brainer for those in the bottom two economic quintiles while those in the top three quintiles may scoff at the suggestion that a (for example) 1 percent premium increase which would result in higher monthly benefit amounts paid to them after their retirement, needs to be legislated into existence.

3) The third suggestion is for provincial pension plans that work in conjunction with CPP, the federal retirement plan. Quebec has its own plan, Ontario has just passed its own plan and other provinces are watching with interest.

Province Passes Ontario Retirement Pension Plan Act – June 1, 2016

Strengthening the retirement income system is critical to the future prosperity of the province. Studies show that many of today’s workers are not saving enough to maintain their standard of living in retirement. Pension coverage is also low for many Ontarians, with only one in four younger workers — aged 25 to 34 — participating in a workplace pension plan. — Province of Ontario | Newsroom

For retired people who have lived in the bottom 2 quintiles for most of their life and may not have a generous company pension, or do not have significant life savings, or do not have valuable real estate holdings that they can liquidate in order to live a fulfilling life, receiving a provincial monthly benefit in addition to Canada’s CPP benefit would dramatically improve their retirement.

It’s not such a big step as some may imagine. Provinces and the federal government charge and collect sales taxes, both levels of government have their own income tax system, and in many ways both the feds and the provinces work together to assure the health and safety of Canadians.

All that needs to be done is to write the necessary legislation (or simply photocopy Ontario’s system) and enact it in each province.

While retirees may not end up receiving two identical monthly benefit payments, even an extra (for example) $500. per month from a provincial pension plan, when coupled to their CPP pension monthly benefit payment, can make all the difference in the world to tomorrows retirees. Especially for seniors whose life partner (and co-payer) has passed away, an extra monthly payment can really make a difference in their lives.

4) Finally, no matter which way it goes with regards to the above points #1, #2, and #3, I hope federal government policymakers take this next suggestion seriously…

During retirement years it is expected that one spouse will pass away before the other — leaving the other to not only grieve, but to also suddenly face a major change in their monthly income.

I respectfully suggest that CPP legislation be changed to ease the suffering of suddenly widowed pensioners by allowing their (deceased) spouse’ normal monthly benefit payments to continue for a full 12 months following the death of their spouse.

That way, the remaining spouse won’t have to face both bereavement and a possible address change due to the sudden drop in income.

Canada could show that courtesy to recently bereaved pensioners now — and it wouldn’t even cost .1 percent — let alone a full 1 percent of the profit that the CPP investment pool presently generates.

We are indeed fortunate to live in this great country, and looking after our senior citizens — the very people who helped to build this great land into what it is today, should always be our first priority.

Let’s always treat our Canadian seniors with the kind consideration they deserve. They’ve earned it.

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Bonus Graphic:

Canada Pension Plan (CPP)

Canada Pension Plan (CPP) policymakers must factor-in global trends.