A new report examining the planned expansion of the Canada Pension Plan (CPP) concludes that policymakers got it just about right.
While some of the reasons being given for expanding the CPP aren’t valid, the move is nevertheless justified, says the report published Friday from Toronto-based consulting firm, Morneau Shepell Inc. (The firm was formerly led by federal finance minister Bill Morneau).
Among other things, the report notes that many workers do not have workplace pensions, and many are not saving enough on their own through RRSPs and TFSAs. And, even those that are saving diligently are seeing high fees eat into those savings. “Even if they are saving enough, they may be paying unnecessarily high investment management fees, a problem that a competitive marketplace has not been able to solve,” the report says.
Moreover, the report suggests that Canadians have not demonstrated the ability to ensure adequate savings on their own. “If workers were more financially literate, and recognized the individual responsibility they must assume, it would justify doing nothing. That is not the case, however, and so the situation for retirees will almost certainly worsen in the coming years,” the report says, “Among the possible remedies, the simplest is a bigger CPP.” And so, it concludes that expanding the CPP is “both reasonable and appropriate.”
The report also finds that the specific enhancement that was just announced is more or less at the right level. While it does have a couple of quibbles with the proposal, “In an ideal world, it would have been better to have just one contribution rate rather than 5.95% up to the old earnings ceiling and 4% beyond that ceiling. It would also have been preferable to make all contributions tax-deductible rather than just the additional contribution due to the enhancement,” the report says, overall it concludes that policymakers got it right.
The proposed expansion meets several key criteria, the report finds, including that it targets middle-income earners, it’s affordable, and it respects intergenerational equity. Additionally, “… there were many CPP enhancement proposals that were decidedly worse than the one that was adopted so we should be relieved with what we got. In summary, we give the Finance Ministers a passing grade,” the report concludes.
The new CPP enhancement is facing similar criticism to the original founding of the CPP, which has proven invalid, the report says, and in time, this latest expansion will likely be proven to be the right move, too.
“Fortunately, the CPP expansion that was announced is close to the optimal size. A larger increase would not have been appropriate and a smaller increase would not have led to an agreement; or it would not have quelled demands for further expansion. Once Canadians grow accustomed to it, we expect that the enhanced CPP will eventually gain the same degree of public acceptance as did the original plan,” the report says.
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