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June 04, 2014
CPP reform can be done, but cost impact varies, experts say

Canada can afford to dramatically increase Canada Pension Plan (CPP) benefits without making major changes to eligibility, according to former Statistics Canada assistant chief statistician Michael Wolfson.

Speaking at a symposium sponsored by the University of Toronto Centre for Industrial Relations and Human Resources this past November, the former statistician and current University of Ottawa Canada Research Chair says that the group facing the biggest income replacement challenge at retirement are those with a family income between $35,000 and $100,000 per year.

Facing near-stagnant wages and low interest rates on investments, middle income earners are forced to either save for retirement or meet day-to-day expenses.  Inevitably, daily expenses take precedent over long-term retirement planning, he says.

According to Mr. Wolfson, CPP benefits should increase to 40 per cent of yearly maximum pensionable earnings (YMPE) from the current level of 25 per cent.  However, to pay for the extra benefits, the pensionable earnings maximum would have to increase from today’s level of $51,100 to $100,000.  Under that regime, most middle income earners — and their employers — would have to make CPP contributions all year, rather than having their retirement contributions cease when they reach YMPE threshold.

Under Mr. Wolfson’s plan, lower income earners would not be forced to make extra CPP contributions.

CPP contribution levels would also have to increase to unspecified levels.

The proposed CPP reforms would mean that an individual earning $100,000 per year, would qualify for a retirement income of approximately $40,000 compared to today’s maximum of $12,150.

While proposals like this one may present alternatives to today’s pension arrangements, new actuarial data may require pension reformers to reconsider their plans.

According to Canadian Institute of Actuaries (CIA) President Jacques Lafrance, new mortality data suggest that a woman age 65 is now expected to live another 24.5 years instead of the 22.1 years assumed in current pension models.  Males the same age can expect to live another 22.5 years, compared to 20 years.

While the addition of another 2.5 years to assumed lifespans may seem modest, the impact on pension pricing could be significant, the CIA president suggests.

“Think about how living an unanticipated 2.5 more years might impact your retirement saving strategy or your employer’s pension plan.  These changes are significant to Canadians, their employers and their governments,” Mr. Lafrance says.

The new pension mortality tables are expected to be released in the first half of 2014.

While the new tables will add pressure to pension funding, the Canadian retirement system is not facing a retirement crisis, he stresses.  Plus, changes such as raising the age in which individuals must annuitize their registered pension and retirement savings from the current age of 71, amending pension legislation to better accommodate phased retirement, and eliminating early retirement incentives in government pension plans would help Canada’s pension system to catch up with today’s mortality and demographic trends.

“Canada is in an enviable position compared with most other developed countries as we are not facing a retirement program crisis,” Mr. Lafrance says.  “However, we should not use that as an excuse to avoid important policy decisions that will benefit all Canadians.”

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