CPP Reform: A Good Idea?

Potential changes to the Canada Pension Plan make for a complex and potentially thorny topic at a time when Canadians simply aren't saving enough for retirement.

The Canadian federal, provincial and territorial governments are worried about whether Canadians will have enough savings to retire and have been holding various meetings to address the problem. Their worry is justified because the majority of Canadians are simply not saving enough.

Let's start with the main retirement savings vehicle, registered retirement savings plans. According to Statistics Canada, in 2011 only 24% of eligible tax filers contributed to an RRSP. The total contributions were $34.4 billion. That is 4.4% of the total available room of $772.5 billion. Of those who made contributions, the average amount was just $2,830.

Why are RRSPs not being used to a greater extent? Because people do not have any money left after paying all their bills. Even for those who are able to start saving in RRSPs, there often seems to be a good reason to draw them down. Many use the RRSP Home Buyers' Plan to buy or build a qualifying home. Others take advantage of the Lifelong Learning Plan to finance their full-time training or education. For others financial difficulties caused by a layoff or divorce force them to take money out of their RRSPs.

And that is the problem with RRSPs: they are discretionary. The Canada Pension Plan works because it is nondiscretionary. If we earn a salary or have self-employed earnings, we have to contribute to it and we can't withdraw from it.

In fact, for many Canadians their only source of retirement income will be CPP, Old Age Security, and for lower-income people, the Guaranteed Income Supplement.

Unfortunately, for most people that won't be enough for them to retire on.

Increasing the CPP sounds like a good idea. Who wouldn't want more money guaranteed for life? The problem is you will have to pay more premiums to get it.

Let's review the current CPP numbers. The maximum pensionable earnings (MPE) under the CPP for 2014 is $52,500. The employer and employee contribution rates for 2014 remain unchanged at 4.95%. For self-employed individuals it is double that at 9.9%.

With the $3,500 basic exemption, that means the maximum employer and employee contribution is $2,425.50 each and $4,851 for the self-employed. If you make these maximum contributions for approximately 40 working years, you should receive the maximum CPP pension when you retire.

According to Service Canada the maximum annual CPP retirement pension for 2013 was $12,150 a year. But the average payment was only $7,234 a year. That means that most Canadians have an income that is less than the MPE amount and/or they are not paying for enough years to earn the maximum.

Let's think about two segments of the population: those who make less than the MPE and those who make more. For those making more than $52,500 in 2014, the MPE could simply be raised. At current rates those earning a salary of $100,000 would pay $4,776.75 in CPP premiums and $9,553.50 for the self-employed.

Personally I would love to be able to increase the amount I pay into my CPP and therefore fund more of my retirement this way. That's because the plan is well funded, low-cost and provides an inflation-adjusted pension for life.

But the real problem is for those making less than the current MPE. Increasing the contribution rates for these people would be very painful, especially for the self-employed, because there will be less take-home pay to make ends meet.

And of course whether the MPE or the contribution rates are raised, it would make hiring more expensive. In today's disinflationary environment that negative effect on employment is the last thing the economy needs.

So it is a complex economic problem with far-reaching ramifications that will be hotly debated in a politically charged atmosphere. Given all that, I will be surprised if changes are implemented any time soon.