Expanding the Canada Pension Plan is one way to solve the current pension crisis, brought on by declining coverage of workplace pensions as well as the drop in the value of retirement savings as a result of market conditions.

That’s an idea now being proposed by a wide variety of stakeholders, from theCanadian Federation of Independent Business to the Canadian Labour Congress.

In a recent report to the Ontario government, Harry Arthurs, a former dean of Osgoode Hall Law School who formed a one-person Expert Commission on Pensions, noted that many submissions received by the commission had raised the possibility that an expanded or two-tier CPP, or a provincial counterpart plan, might offer many of the advantages that Arthurs was trying to capture in his recommendation to promote large-scale benefit plans as a way to improve pension coverage.

Details varied, says the report. Some wanted to expand the existing CPP, either by increasing the benefit (now 25% of a retiree’s best 40 years of accruals) or by increasing the maximum earnings on which the benefits accrue (now $44,900 — approximately the average annual wage), or both.

Other submissions suggested allowing employers and employees to make extra contributions to the CPP voluntarily (to be invested by the Canada Pension Plan Investment Board). The additional contributions would be used to buy extra benefits that could be administered at a low marginal cost within the existing CPP framework.

Regardless of the details, says the report, those making the submissions maintain that a public scheme of some sort will enhance pension coverage, improve benefit portability and contain costs.

The CFIB, for example, suggests small-business owners be allowed to make additional voluntary contributions to the CPP, which, it says, “will provide members and their employees with a superior savings plan beyond their current contributions.” But the CFIB would support this option only if the contributions were voluntary.

The CLC wants to see the ceiling on the yearly maximum pensionable earnings on which CPP contributions are made doubled to reach $90,000. It points out contributions to U.S. Social Security are based on pensionable earnings to a maximum of US$92,000.

As well, the CLC says, the replacement rate for CPP benefits should be doubled to reach 50% of pensionable earnings. The CLC believes workers would be prepared to pay higher premiums to provide better benefits.

Arthurs’ report notes he had “neither the mandate nor the resources to investigate the possibility that an extension of the public pension system might complement, supplement or even replace the existing voluntary occupational pension system, which was the focus of my [commission’s] work … it is an idea that clearly deserves careful study over the longer term, while efforts to reinvigorate the present system are under way.”

Expanding the CPP is easier said than done. When major changes were made to the financing of the CPP in 1997, the federal and provincial finance ministers, who administer the plan, had agreed that any future benefit improvements would be fully funded. Changes now would undoubtedly mean increases to the contribution rate.

Further complicating matters is the fact that any changes to the plan must have the approval of two-thirds of the provinces having two-thirds of the population. And some provinces seem to be moving in the direction of setting up their own publicly administered defined-contribution plans.

For example, a joint Expert Commission on Pension Standards, set up by Alberta and British Columbia, has recommended the two provinces create a new pension plan, operated independently and available to any employer, employee or self-employed person.

B.C. has announced it will create a privately financed DC plan. According to B.C. Premier Gordon Campbell, the plan will create “a viable option for those who want to participate.” More than 75% of private-sector workers in B.C. are not covered by a group pension plan.

“By pooling contributions and managing them under a single plan,” says Campbell, “we will maxi-mize investment earnings, lower administration costs, reduce risk and give people new, worry-free access to guaranteed pension entitlements.”

Nova Scotia’s pension review panel is recommending a similar approach to improving pension coverage in that province. The panel says the province should support the creation of plans that would be available to all employers in the province and administered by an independent agency. Participation would be voluntary but, the panel says, consideration should be given to requiring all employers above a certain size that do not already have a plan to participate in the province-wide plan unless they opt out.

@page_break@According to the proposal, the provincial agency would be responsible for the pooling of administration and investments but would not be responsible for the funding risks, nor for any administration or investment management costs.

Observers suggest these moves by the provinces may be the first step toward a national supplementary pension plan. It’s an idea advocated by well-known pension guru Keith Ambachtsheer, director of the University of Toronto’s Rotman International Centre for Pension Management.

Ambachtsheer’s proposal for a Canada Supplementary Pension Plan would address two major shortcomings in workplace pension plans and individual retirement savings: the low rates of coverage of workplace pensions and the millions of Canadians “who currently have their retirement assets invested in retail products with high sales and management costs” — which makes it difficult for planholders to generate adequate pension income at affordable saving rates.

The proposal would see all Canadian workers without a workplace pension plan automatically enrolled in the CSPP, with the opportunity to opt out if they wish. The CSPP could be a joint federal/provincial plan, with CSPP contributions deducted from earnings in the same way as CPP contributions are.

Contributions would be directed into personal retirement savings accounts set up for and owned by each CSPP participant, and there would be an earnings floor and ceiling for deductions. Accumulated RRSP assets could be transferred into an individual’s CSPP personal retirement savings account. The CSPP would manage a risk-optimizing portfolio in which each personal retirement saving account could participate.

According to Ambachtsheer: “The CSPP offers all Canadians a realistic chance to achieve post-work income adequacy in a transparent, fair, cost-effective and portable manner.”

He argues that the creation and implementation of such a plan can’t be left to “private-choice market forces alone” and emphasizes that “proactive, public choice intervention” by Canada’s federal and provincial governments will be required. IE