Not-So-Modest Options for Expanding the CPP/QPP

SummaryApproximately half of middle-income earners over 40 today are expected to see a significant decline in their standard of living upon retirement. While finance ministers have spent the past few years considering the future of the retirement income system, many of the reforms adopted or proposed do not address this impending income gap. For the bulk of baby boomers about to retire, these reforms either will be phased in too slowly to make a difference or they rely too heavily on ineffective voluntary savings plans.In December 2012, provincial and federal finance ministers agreed to examine options for a "modest" expansion of the Canada and Quebec Pension Plans (CPP/QPP) at their next meeting in 2013. In this study Michael Wolfson, former assistant chief statistician with Statistics Canada, warns these proposals will also miss the mark unless more innovative options can be found.To find these innovations, Wolfson argues, we must challenge conventional assumptions about pension reform. Most critical is the premise, underlying nearly every proposal to date, that future enhancements to the CPP/QPP must be fully funded. This requirement means new benefits can be drawn only as they are built up over time, thus extending the period for full implementation over nearly a half century.Removing this condition, Wolfson estimates what would be required to enhance CPP/QPP benefits under an accelerated phase-in plan (over 20 years), while still ensuring the long-term solvency of the pension fund and maintaining affordable and stable contribution rates. Wolfson's proposal assumes a doubling of the year's maximum pensionable earnings to $102,200 and an increase in the earnings replacement rate from 25 to 40 percent on earnings beyond $25,550.Looking at various scenarios using Statistics Canada's microsimulation model, LifePaths, he finds that these objectives could be readily achieved if the age of eligibility for the enhanced benefits was set between age 68 and 70, three to five years later than the current eligibility age for the CPP/QPP (this would not affect existing benefits). Wolfson also points out that as it is structured now, the CPP and QPP fall short in recognizing the significant disparities in health and life expectancy that exist between lowand higher-income earners and how these disparities affect the cumulative benefits received. The author proposes ways to adjust benefits to help compensate for these disparities in life expectancy without jeopardizing the solvency of the plans.Taken together, these reforms would not only go a long way in securing the retirement income prospects of a large cross-section of Canadians, they would also encourage workers to remain in the labour force longer. This would contribute to increased levels of future consumption, higher tax revenues, and lower government spending on income support programs such as Old Age Security and the Guaranteed Income Supplement.ResumeOn prevoit qu'environ la moitie des personnes a revenu moyen qui sont âgees de plus de 40 ans aujourd'hui subiront une baisse importante de leur niveau de vie a la retraite. Et bien que les ministres des Finances se soient penches ces dernieres annees sur l'avenir du systeme de revenu de retraite, les nombreuses reformes proposees ou adoptees ne suffiront pas a pallier cet ecart de revenu imminent. Ces reformes s'appuyent sur une mise en oeuvre trop graduelle ou comptent fortement sur des regimes d'epargne-retraite volontaires peu efficaces, de sorte que la grande majorite des baby-boomers ne pourra en beneficier.En decembre 2012, les ministres des Finances se sont engages a examiner, a leur prochaine rencontre en 2013, diverses options en vue d'une bonification « modeste » du Regime de pensions du Canada (RPC) et du Regime de rentes du Quebec (RRQ). Dans la presente etude, Michael Wolfson, ancien statisticien en chef adjoint du Canada, previent que les mesures envisagees ne pourront atteindre les objectifs vises et qu'il faudra concevoir des options plus innovantes. …