Ross Urquhart: Two ways to improve the Canada Pension Plan
The federal and provincial governments are presently arguing about increases in contributions to the Canada Pension Plan system to help alleviate the problem of workers who can’t afford to retire. But business lobbyists are working overtime to stall the process—as they have done for years—by threatening to decrease their workforce and reduce investment if this new “payroll tax” is implemented. The minister of finance appears to be in their corner so the likelihood of significant change is somewhere between slim and none. It’s too bad that years of tossing the problem around like a hot potato doesn’t make it go away.
I spent much of my adult life as an equipment operator running various forms of trucks, loaders, graders, and, on occasion, rollers, packers, sweepers, cranes, hoes, and no doubt a few other things I can’t remember. (I can’t remember a lot of things nowadays—maybe it was all those exhaust fumes?) The fact that I was well educated turned out to be more hindrance than help, but living in a small community with few job opportunities you take what you can get. In retrospect, it was the right job for reasons too numerous to go into but predominantly centred on the quality of the individuals I worked with, and their incredible humour, honesty, and generosity.
During those years my workplace had a relatively high turnover, and thanks to the aforementioned self-effacing humour and honesty of my coworkers I had the opportunity to witness firsthand their level of financial literacy. In a word, it was dismal. The lack of understanding with regards to credit and interest rates, in particular, was painful to watch as many endured years of unnecessary stress and restricted choices as they struggled out from under poor financial situations. When it came to savings, things weren’t much better.
The contractors I worked for had retirement plans, but all were along the lines of group RRSPs where a percentage of wages was set aside and matched by the company. Statements were sent out regularly informing us of the amounts being deposited, where it was invested, and the accumulated total. Most of the crew flipped right to the totals. The rest might as well been written in Sanskrit.
As those totals grew the numbers looked impressive. When you are straining to make house and car payments and looking at a swelling Visa bill to pay off Christmas, or the back-to-school costs for your children, $40,000 or $50,000 in an RRSP looks huge. I’ve seen people who couldn’t take the pressure go in and raid these funds, at a tremendous cost, only to realize later they are worse off than before. Most people are able to leave them alone but few understand exactly what those numbers truly mean. $50,000, $100,000, $200,000 may sound like big money, but when you tell them even the biggest of those numbers will only supply $500 a month upon retirement they look at you in disbelief.
Interest rates are low, and they are going to stay low for as long as the governments can keep them that way. It’s great for buying houses or cars (or paying the national debt) but it makes retirement very expensive—and if my experience is any indication, most working people have no clue what they need, or will have, when that day arrives.
So, for what it’s worth, here are my suggestions.
First of all, we do need the CPP contributions to increase because we need the payouts to increase. In the past both workers and employers shared cost increases equally because this was proscribed by the federal government. But, now, according to the business community, the level of payment has reached a point where it can impact the viability of their operations. Therefore, why not make the contribution percentage negotiable as part of their employment contract? Both parties regularly negotiate contributions to group RRSPs or medical plans or other benefits as part of their working agreement. As long as the CPP administration receives the proper amount per worker what difference should it make to them who paid what?
Secondly, and more importantly, I believe workers should be able to purchase increased CPP payouts upon retirement. I don’t know what percentage would comply but the educational value alone would be worth the opportunity. For instance, if every $10,000 of your RRSP transferred to the CPP fund upon retirement could buy you an extra $40 per month in payouts—and if this was explained and detailed on the individual CPP statements mailed out every few years—workers would then begin understanding the true value of their retirement savings. With a quick calculation, any worker could take the totals in their retirement savings plan—say $100,000—and know that it would provide 10 times $40, or $400 more per month upon retirement. If this figure is added to the projected payout displayed on the CPP statement along with the current Old Age Security payout (which should also be on that same statement) each person would then have an understanding of what kind of total monthly income awaits them—or what changes are needed to improve it.
That figure of $40 for every $10,000 was not picked out of the air by the way. It equates to a 4.8 percent annual return, which is more than you can expect from most financial institutions in the business of serving small investors. Unfortunately, the average worker isn’t capable of managing the kind of portfolio needed to produce real income in a low interest rate environment so outside help is necessary. At present, this service is provided by banks and investment companies at the cost of substantial fees, which are subtracted regardless of portfolio performance. If you have to put your savings at risk to earn a five percent annual return and you then lose two percent, or more, in accumulated fees, your retirement is not only threadbare but precarious. The consequence is that many working people are staying on the job until their bodies fail simply to meet basic needs, and this should not be necessary in a top tier country, especially if you have already contributed more than 40 years of hard work.
The management of the CPP fund, even though it’s a function of the federal government, is highly regarded in the financial community and it regularly earns better returns than a host of private funds—averaging in excess of six percent annually. Offering the option of purchasing increased CPP payments should cost the government very little. In addition, the transparency value of outlining the amount your retirement savings would generate—side-by-side with your proposed CPP payouts and your Old Age Security entitlement, all on the same page—should provide working people with a better understanding of what they can expect, or what goals they can aim for in their retirement years. Educating people about investing in their future probably won’t get any easier in our increasingly complex and volatile financial world—it regularly confounds even those we designate as experts—but putting straightforward, useful information in the hands of each working person is one step government can, and should, take.