The provincial government is concerned that a lot of Ontarians are not putting aside enough money to retire. It has introduced the Ontario Retirement Pension Plan (ORPP) Act. If passed, it creates a framework to commit the government to address what it identifies as “the undersavings problem.”
In net effect, this mandatory provincial plan, once enacted in 2017, would require employers and their employees to each contribute 1.9% on earnings up to a maximum threshold of $90,000 per employee. This represents a 40 percent increase on top of what employers and employees already pay towards the Canada Pension Plan (CPP).
The Canadian Federation of Independent Business (CFIB) and others claim the plan’s unintended consequences would be destructive. CFIB states the ORPP will put Ontario's businesses at a competitive disadvantage over businesses in provinces without the supplementary plan. “Most public sector workers and big businesses would be exempt from paying into the plan – it will be small business owners and their employees footing the bill.”
If this trend continues, individuals will face lower standards of living, their consumption in retirement may decrease, and they may rely more on publicly funded social assistance programs.
There are, inherent in the government’s position, some assumptions. For example, that there is a forthcoming “undersavings” problem that may impact as many as 35 percent of all Ontario households, and that it is the job of the government to deal with it. I asked the Ministry of Finance spokesperson about that. They wrote back:
Study after study tells us that Canadians are not saving enough to maintain their standard of living in retirement. As well, in recent months, the Conference Board of Canada and Manulife both released studies showing that growing numbers of people feel they are not saving enough for their retirement, with many fearing they will never be able to retire.
As for a raison d’etre for the ORPP, the Ministry comments:
If this trend continues, individuals will face lower standards of living, their consumption in retirement may decrease, and they may rely more on publicly funded social assistance programs.
That’s not good for people. That’s not good for business. That’s not good for the economy. The undersavings challenge is a complex issue that requires a multi-faceted approach and a range of tools. The ORPP is one of those tools, as are RRSPs and other personal savings vehicles.
It will initially provide coverage to more than 3 million working Ontarians, ensuring they have a predictable, stable source of funds upon retirement. This won’t replace RRSPs and other voluntary savings vehicles. Personal savings will still be an essential part of the equation.
Is ORPP a workable answer?
But is it really the job of government to help ensure that Ontarians are better able to enjoy their retirement years?
But is the proposed ORPP a good method for addressing these projected challenges? The CFIB says, no. They say instead of hitting Ontarians with higher payroll taxes, the provincial government should propose Pooled Registered Pension Plans (PRPPs) - voluntary, low cost and administratively-simple pension plans that will help employers, their employees and the self-employed to save more for retirement.
The Ontario Ministry of Finance cites a 2014 study by Statistics Canada, “New Facts on Pension Coverage in Canada,” which states that larger workplaces were more likely to offer Registered Pension Plans (RPPs) than smaller ones in 2012. This suggests that the costs associated with administering plans are discouraging employers from sponsoring them.
But is it really the job of government to help ensure that Ontarians are better able to enjoy their retirement years? I put the issue to Ann Mulvale, former Corporate Director of OMERS (Ontario Municipal Employee Retirement System Administration Corporation) and former Mayor of Oakville.
“The Provincial government is offering a compulsory system when most Canadians do not take full advantage of their existing RRSP and tax-free saving accounts. I believe the accounts provide lots of options for the average Canadian without the risk of mandatory provincial pensions.”
Mulvale cautions that a mandatory pension plan may in fact have the unintended consequence of making it harder for the average citizen to pay off a mortgage or for post secondary education.
Mulvale adds that if there is an undersavings problem, one smart method for dealing with it is to offer basic financial literacy courses in junior high. “I believe the intent of the provincial government was good, and helped get them re-elected. However, giving people the skills to make their own financial decisions that meet their needs has less risk of jobs disappearing and/or not being created by small business in particular.”
Others point out that ironically all Ontarians are already paying for a provincial retirement plan – for public sector employees, municipal employees , teachers, etc.
Paul McKeever, leader of the Freedom Party of Ontario and himself a labour lawyer, says each person should have the freedom to invest where they want to. “No one should be forcing you to invest. We should be free to do what we want with our money.”
He points out that the Canada Pension Plan in net after-inflation dollars gives Canadians a very poor to no return on investment. Currently, the maximum CPP benefit is $12,800 per year. In 2014, the average CPP annual benefit paid out was about $6,500 in Canada and about $6,900 in Ontario. As a result, many individuals face a potential retirement income gap.
McKeever contends that the introduction of the ORPP is one method whereby the provincial government is bracing itself for the large number of baby boomers expected to retire over the next decade. McKeever points out that many people consider the equity in their homes as a cornerstone of their retirement strategies. “If property values crash as these people prepare to retire, there is going to be a real problem.”
The forthcoming challenge may be compounded by current economic realities. In his practice, McKeever says the average age of a person losing a job right now is about 53. People in their fifties, now losing their positions to younger, “cheaper” workers, may have to start living on their savings or equity now.
This means they may need some type of welfare and support later. The problem isn’t just “undersavings”, there is a system-wide problem based upon false assumptions about the economy and the responsibilities of the individual and the government.
McKeever says there may also be the temptation to use the funds collected into a pension plan as part of general government funds. That was undertaken at the federal level from 1993 to 2006 when the federal Liberals took $50 billion dollars out of the EI fund to balance the federal budget.
However, the Ministry of Finance says enabling higher incomes amongst retirees means stable consumption in the future and decreased reliance on publicly funded social services, improving job and economic growth in the long term.
What happens to someone who works in Ontario for, say, 20 years and then moves to another jurisdiction? I asked the Ministry: is the plan portable? I received a somewhat vague answer The ORPP will be portable across participating employers. Under the ORPP, benefits would be earned as contributions are made, ensuring the plan is fair and fully funded. The Ministry of Finance is currently undertaking the necessarily analysis and consultation to develop plan details.
The chief question remains: is there not some other way by which the provincial government could achieve the same objectives without entitling itself to a larger slice of Ontarians’ paycheques?
For Mulvale it comes down to educating and empowering individuals. “Provide people with the tools-education to make wise decisions for their own financial situation. Licence effectively the financial advisor industry. Adjust the various tax-free or tax-beneficial tools to encourage people to plan for their future with the support of a social assistance programme for those without the means to truly save for themselves, i.e. a national housing strategy, and leave CPP and people’s own devices to plan for a worry free retirement.”