Recently, the Ontario government has been rumbling about creating a second mandatory pension plan. I flatly refuse to call it the OPP, however! Those letters have been in use for years and immediately bring to mind the image of a we-had-to-buy-it non-aerodynamic car with a strange paint job and multicoloured lights flashing on top. So the first thing the government would have to do is come up with a name that has an available acronym. I was trying to make something from “OPEN” but couldn’t. Maybe OPUS? Ontario Pension Universal Security? Ontario Pension United Savings? Hmmm. I’ll have to work on that. Any way, here’s why I think an Ontario Pension might be a good idea.
CPP of $12,000 Equals Poverty
OK, maybe it doesn’t if you have a fully-paid-off home and some other sources of income. But in general, the CPP is not going to provide enough income for many Canadians to live on with a decent standard of living.
And, even more unnerving, most Canadians are not going to be eligible for the maximum CPP. Right now, the average CPP payment is 60% of the maximum. In July 2013 that meant an **annual** CPP payment of $7234. And yes, that’s taxable income.
I very highly doubt that most average Ontarians know just how little they will get from CPP.
Voluntary Retirement Saving Doesn’t Work
I know the government wants us to be grown-ups and save money ourselves for retirement. That’s why they created RRSPs and perhaps part of why they created TFSAs. They also have talked about another voluntary plan called a Pooled Registered Pension Plan.
[Really. They expect Canadians to feel good investing their own money is something called PRPP. PRPP is a sound a baby makes. It does not inspire confidence. Ontario take note and choose something with a GOOD solid secure sounding acronym!]
Despite having access to RRSPs for decades and TFSAs for years, many Canadians don’t have them maxed out. Yet a maxed out RRSP only reflects a saving of about 18% of a person’s gross earned income per year. For an Ontarian in the 46% tax bracket that means they are only setting aside less than 10% of their net income (if they spend their tax refund.)
Although some of us do max our RRSPs and TFSAs we all know plenty of friends and family who don’t. Voluntary saving becomes optional saving when roofs leak, cars break down, children need braces and wedding bells ring.
We Need Forced Retirement Saving
I’m sure there are many people who will literally scream if they are forced to save for retirement by a mandatory deduction taken off the top of their pay cheques.
Tough.
Why should I (who have saved for retirement since the day I graduated) have to pay welfare to keep those who didn’t from starving? (Note that I said didn’t not couldn’t. People who are unable to work would not have to contribute to an Ontario pension if it is a payroll deduction.)
If someone wants to argue that the forced savings amount could be obtained by taking it from the taxes we already pay, presumably by reducing the number of tax dollars the Ontario government wastes, I would not argue with that. After all, a billion dollars to cancel a few electricity plants would have topped up quite a few retirement accounts!
Employers Should NOT Have to Contribute
I know the Ontario government hasn’t announced any details yet but I’d like to suggest they do not make employers contribute to this new pension scheme. Payroll taxes and the cost of complying with them are already onerous. Leave this one squarely on the individual. It will also avoid penalizing workers on contract who usually have to pay both the employee and the employer shares of programs like pensions.
What Do You Think?
I imagine the idea of an Ontario Pension program will have both strong supporters and sturdy opposition. Which side do you fall on? Please share your views with a comment.
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A modest expansion of CPP is preferable, but I can understand why Ontario or any other province might want to go it alone if the federal government isn’t willing to enhance CPP.
Some crappy acronyms:
MOP – Mandatory Ontario Pension
SOP – Secure Ontario Pension
SORP – Secure Ontario Retirement Pension
OAP – Ontario Assured Pension
Yes, improving CPP could be even better.
Did you consider OSAP? Ontario Secure Assured Pension?
Oh, wait, that one’s taken already for the Ontario Stereo Assistance Program, isn’t it?
I like SOP!
I live in the USA and am totally unfamiliar with CA pension plans but I support mandatory retirement savings (up to a point) for everyone. Our 401k is a disaster. Theresa Ghilarducci suggests replacing it with a national savings plan run by the Gov with a guaranteed rate of return. The Gov provides plan management and bears investment risk. It will never come to pass because Wall Street will make little to no money on this scheme and you know who owns Congress, right? He who has money makes the rules.
Our existing national mandatory pension plan, CPP, gives contributors back a guaranteed amount per month. The amount is fixed on the day you retire, qnd only increases with inflation. (It’s sort-of indexed to inflation but in reality it gradually lags behind inflation.) The trick is the amount you get depends on how much you contributed. It doesn’t directly guarantee a return, they rather arbitrarily set the maximum payout at about 25% of the maximum salary for contributions. For example, right now you only pay a percentage of your salary into CPP for a salary up to a maximum of about 51,000/y. If your salary is above that, you don’t, and can’t, contribute any more. So the maximum annual payout is about $12,000 a year. I think many Canadians, earning say $85,000 a year, think they will get 21,000 a year. They’ll be in for a shock when they go to retire.
I agree it’s VERY difficult to get governments to start a new scheme. Even to significantly change CPP requires getting (almost) all of our provinces and territories to agree to the changes: that’s very difficult.
Wall Street should actually like it, if it’s like CPP, because the plan itself becomes a very large investor. (The government doesn’t fund CPP out of general taxes. It is self-funded by investing the contributions.)
Thanks for your comment!
I agree with the general sense of your post, but I’m wary of the Ontario government getting involved with anything — it’s bound to cost more and citizens will get less than expected.
Also, is it possible to get an idea of how much of the average 60% of max. CPP payment is because of people requesting their CPP before age 65?
Although I think the reason most people get less than the max for CPP is because of low earning years, you are right that taking CPP early (through choice or through ill health or a layoff) will affect the average. I don’t know how much of the difference is caused by that, but I should try to find out.
I agree that the Ontario government, in fact all governments, have a less than great track record with handling our money. I was assuming that they would have an independent group do the investing, like CPP does, but you know what they say about people who assume! Right now I think Ontario is just trying to force Ottawa to improve the CPP rather than really intending to start their own plan.