It isn’t every day that a proposal from Canada’s smallest province gets the attention of national policy-makers. Finance Minister Wes Sheridan’s ideas about improving the Canada Pension Plan prove you don’t have to be big to be smart.
Like any Maritime finance minister, Sheridan knows that Islanders are marching toward a future swamp when it comes to pensions. The population is aging and in the future, fewer working people will be paying in to the system while more retired people will be collecting.
So that will inevitably produce a squeeze, even on the mighty CPP, one of the richest and best-run public pensions schemes in the world. At last valuation, the CPP fund was worth $188.9 billion and growing. The CPP Investment Board, which runs the plan, projects it will be worth more than $750 billion in 2040.
The forecast for the fund is stable; people don’t have to worry about whether the CPP will be available for them when they retire. The plan isn’t even paying out from its holdings yet because contributions from workers and employers are keeping it in balance.
It will have to pay out starting in 2021 as the size of the retired population grows. But even that will be only a small amount of the total, projected then to be at $290 billion. The Board predicts the fund will keep growing even as retirees start to draw from it.
It’s not the size or the dependability of the CPP fund that worries Sheridan. The problem is, will the CPP pay enough to keep retired people from tough times in an age of fewer and shakier private-sector pensions?
There’s no denying the trend: companies are abandoning traditional fixed benefit pension plans in favour of fixed contribution schemes. Instead of getting a guaranteed payout, as you do with a conventional pension, benefits vary with markets and trends in interest rates.
Some companies aren’t offering pensions at all, leaving it entirely up to employees to save for themselves. Not everyone can do that, either because it’s too expensive, too complicated or they feel they can’t afford it.
Planners are also concerned about dropping savings rates among even those who have pensions. For many working people, investment is complicated and tied up in financial jargon. It’s not always easy setting up a reliable plan for the future.
Sheridan has come up with an idea to smooth things out for future retirees, especially those in the middle classes. Low-income Canadians are protected by existing plans and the rich, well, they’ve got money.
Millions of Canadian families fall in between those two, they’re the bulk of the population. It’s in the national interest to make sure those people have the ability to fend for themselves in retirement.
Sheridan’s plan would significantly increase contributions for middle-class earners in that big bracket of annual incomes between $30,000 and $100,000. They would pay more in contributions, perhaps double, but the payoff would be a much better payout in retirement.
Instead of a maximum of $12,150 a year, pensions would max out at $23,400.
In a late-September speech to the Atlantic Provinces Economic Council, Sheridan argued that leaving everything to the individual doesn’t protect the wider society.
“The current system is becoming too dependent on individual savers, who have a propensity to under-save, are over charged and invest in products that may not be right for them,” he said.
Voluntary plans can’t solve all the problems because too few workers and employers take advantage of them. The CPP reaches everyone and Sheridan says that’s where change can do the most good.
Experts who have been studying Canadian family finances say workers just starting out in their careers are the most vulnerable. But since all employees pay into the CPP, it is the younger worker of today who will benefit most in the future if Sheridan’s plan were to be adopted.
“The impact of expanding the CPP will provide the largest benefit to workers just entering the labour force,” he says.
The idea is gaining currency in other provinces, although there is concern that the costs to businesses will be too high. Small business owners are particularly concerned because they often operate on tighter margins.
But at least Sheridan is putting out some ideas, even if they are coming late. As he says: “the best time to plant a tree was 20 years ago. The second best time is now.”
- Dan Leger is a Halifax-based writer and commentator. Twitter: @Dantheeditor.