White Paper Canadian Pension Security, Adequacy and Coverage; October 2010 Presented by the Liberal Party of Canada Expert Working Group on Retirement Income Security 1
In a country like Canada, it is unacceptable that senior citizens would be subjected to poverty and squalor during their retirement years. If Canadians are to take a more active role in retirement planning, then governments must also be prepared to step up and do their share. Private and public retirement saving options must be explored and integrated more effectively with one another. We know that systems such as the Guaranteed Income Supplement, the Canada Pension Plan and the Old Age Security Act are important but they are only elements of a much larger strategy. Hon. Judy A. Sgro, Privy Council, MP York West (Ontario) Official Opposition Critic for Seniors and Pensions For Copies Please Contact: Hon. Judy A. Sgro, Privy Council, MP Official Opposition Critic for Seniors and Pensions 204 Justice Building House of Commons Ottawa, Ontario K1A 0A6 sgroj0@parl.gc.ca 2
Executive Summary Prior to the Great Depression, most Canadian social services were delivered by a patchwork of religious, volunteer and charitable organizations. From a historical perspective, the notion of state-sponsored unemployment, pension or health services initially took root following the end of WWI with limited programs such as the Old Age Pensions Act established by Mackenzie King s Liberal Administration as early as 1927. Today, despite the relatively short history associated with the existence of social programs such as Old Age Security (1952), the Canada Pension Plan (1966) and the Guaranteed Income Supplement (1967), many Canadians view them as defining elements of the national identity. Most Canadian seniors are eligible for Old Age Security, a taxable monthly social security payment. Additionally, most former workers can receive Canada Pension Plan or Quebec Pension Plan benefits based on their contributions during the course of their careers. As well a number of Canadians have a private pension through their employer and/or take advantage of government tax-shelters such as a Registered Retirement Savings Plan and/or a Tax Free Savings Account. All can, in accordance with their own income constraints, save outside of such government-regulated tax-shelters. On paper it may seem as though Canada has already addressed the challenges presented by an aging population through the utilization of a range of public and private mechanisms. Despite this apparent resolution, retirement income security, adequacy and coverage continue to be a looming problem that requires the immediate attention of business, labour, individual citizens and of governments at all levels. The undeniable fact is that, over the next twenty to thirty years, Canadian pension regimes will face a perfect storm of an aging population with longer life spans; dramatically higher levels of personal debt coupled with lower disposable incomes; and global economic and market instability caused by environmental degradation, population migrations and the shifting prominence of developing countries. Immediate steps must be taken in the short-term if pension security, adequacy and coverage are to be attainable for the long term. In an effort to ensure that Canada s retirement income system is prepared for these challenges, the Liberal Party of Canada Expert Working Group on Retirement Income Security (Working Group) suggests adopting a multi-pronged, internally coherent strategy that will shore up our system while being mindful of the following key principles: 1. Underscoring the Inherent Societal Value of Functioning Pension Systems. A strong and reliable retirement income regime is in everyone s best interests (individuals and governments). Strain on essential social services, such as the healthcare, welfare and housing systems is reduced. A robust retirement system would provide the elderly and their families with flexibility in meeting their needs. 3
2. The Re-Thinking of the Three Pillars of the Pension System. Canada has long prided itself on the success of its current retirement income system. The three primary mechanisms (or pillars ) associated with that system are: Old Age Security/Guaranteed Income Supplement; the Canada Pension Plan; and the various private plans and privately administered options. A fourth pillar includes private savings outside of tax sheltered plans (equities, home equity etc.) These structures have provided a strong base, however they will face new pressures as the national population continues to age over the next twenty years. Weaknesses must be purged and strengths should be expanded upon; and 3. The Integration of Existing Systems. It is essential that the existing structure be examined holistically and with a multi-generational focus. Public and private structures should be integrated with the stated goal of providing more seamless coverage to the population. Consideration must also be given to those who have traditionally fallen through the cracks. In particular women, who statistically endure a greater rate of poverty, due largely to factors involving longevity, employment type and tenure, must receive the attention needed to ensure retirement income security, adequacy and coverage on par with all Canadians. Bearing these principles in mind, and understanding the need to respect any relevant jurisdictional and partnership issues, the Working Group has devised specific recommendations to help ensure Canada s pension and retirement saving structures are fortified in a way so as to ensure they are prepared for the anticipated perfect storm. Those reform proposals include: 1. The establishment of a Supplemental Canada Pension Plan (SCPP). Canadians have come to trust the Canada Pension Plan (CPP). The CPP is widely seen and accepted as a safe and dependable retirement savings vehicle. The establishment of a voluntary SCPP would build upon that trust while allowing Canadians to set aside extra, when possible, in a vehicle that promises a return. Moreover, an SCPP would also permit small businesses to offer employee pension contributions without the administrative or underwriting expenses associated with traditional pension plans; 2. Launching financial literacy measures. For the most part, Canadians are unsure as to the existence and/or impact of various tax provisions, savings vehicles and/or estate planning options. It is widely accepted that Canadians collectively spend billions of dollars each year on service charges, interest expenses, fees and lost income resulting entirely or in part from a lack of financial literacy. By providing a greater access to timely and easily understandable market/financial management information, Canadians could save millions; money that could be redirected to retirement savings; 4
3. A review of the Cost of Living calculation. One of the most common complaints expressed by those receiving OAS/GIS/CPP/QPP is that the annual cost of living increase is insufficient when gauged against the actual cost of living increases experienced by the said recipients. Further examination has indicated that regional and/or provincial cost increases often outstrips statistical increases offered on a national basis. The Working Group is therefore recommending a re-examination of the formula utilized to calculate costs of living increases to OAS/GIS/CPP; 4. The Income Tax Act a Device for Innovative Change. Most Canadians regard the Income Tax Act with apprehension and a degree of trepidation. That said, the Income Tax Act, when used appropriately, can be a great motivator. For example, when the Income Tax Act was amended in 2008 to allow for the creation of Tax-Free Savings Accounts, during fiscal 2009 4.7 million Canadians deposited approximately $16 billion worth of potential retirement savings. The Income Tax Act can and must be harnessed in new and innovative ways to promote further savings for retirement; 5. The Creation of a Stranded Pension Agency. Such an agency would represent a tremendous safeguard against economic instability created as a by-product of events such as the current global recession. A stranded pension agency would serve as a form of public pension trustee for pension plans financially impacted as a result of corporate insolvencies. Essentially, the agency would serve as a buffer so as to prevent the liquidation of pension plans at the bottom of a depressed market cycle. There would be no need to create a stand-alone agency to achieve this purpose, by relying on the Supplemental Canada Pension Plan suggested above; and 6. Regulatory Modernization. Our modern globalized economy presents tremendous opportunity but, at the same time, domestic and international competition has become fierce, constant and unrelenting. Governments must therefore examine their own regulatory and statutory environments; crafting changes that reflect the new economic realities and help to maximize opportunity for all Canadians and their employers to save for the future. This modernization process can and must include cross-jurisdictional cooperation and common goals if success is to be achieved. The various regulatory changes necessary to fine-tune our existing system are described below. Many argue that the true value of a nation can be gauged by the manner in which it treats the most vulnerable of its people. This adage is perhaps most appropriate in the context of pension reform and retirement income security, coverage and adequacy. Having our elderly live in poverty or near poverty is simply not acceptable in a country as wealthy as Canada. It is also not acceptable that bureaucracy blocks the efforts of Canadians to provide for their retirement in an efficient manner. 5
Statistics Canada estimates that Canada s population over the age of 65 could reach an unprecedented 10.9 million by 2036. With this, as the Canadian population continues to age, new financial and logistical challenges will emerge. While programming currently provided under legislation such as the Old Age Security Act and the Canada Pension Plan are essential components to the nation s retirement income and pension strategies, they are not the only factors in play. The proposed Supplemental CPP, along with existing RRSPs, TFSAs, and a host of private investment options in place or to be created, must be better integrated, if we are to ensure Canadians have pension coverage, adequate pensions and secured retirement funds. Whether we are referencing the Old Age Pensions Act (delivered by the Mackenzie King Government), the Old Age Security Act (delivered by the Louis St. Laurent Government), or the Canada Pension Plan and Guaranteed Income Supplement (both delivered by the Lester Pearson Government), the Liberal Party of Canada has a collective legacy of valuing the long-term pension security of Canadians. As we move forward, the Liberal Party is again needed to step forward and build upon this legacy by fortifying and strengthening these essential societal benefits. Strong national leadership, determination, vision and compassion will each be required if the Liberal Party is to ensure that Canadians are afforded with the opportunities for true pension security, adequacy and coverage. The proposals contained herein are intended to provide the necessary technical components for the above and they are respectfully submitted for consideration. Hon. Judy A. Sgro, Privy Council, MP Co-Chair Liberal Party of Canada Expert Working On Retirement Income Security Jean-Pierre Laporte, BA, MA, JD Co-Chair Liberal Party of Canada Expert Working On Retirement Income Security 6
Table of Contents Executive Summary 3 Table of Contents 7 Canadian Pension Security, Adequacy and Coverage; Introduction 8 The Value of Functioning Pension Systems 9 Dignity in Retirement 9 Proactive Planning 10 Implications on the Public Purse 11 International Competitiveness 11 Intergenerational Equity 12 Partnerships 13 Revisiting the Three Pillars of the Canadian Retirement Income System 14 Old Age Security / Guaranteed Income Supplement 14 Canada Pension Plan / Quebec Pension Plan 15 Income from Other / Private Sources 15 The Integration of Existing Systems 17 Specific Reform Options 19 A. Establishing a Supplemental Canada Pension Plan 19 B. Review and Reform of Existing Canada Pension Plan 27 C. Stronger Funding Rules 28 D. Launching Financial Literacy Measures 28 E. Reviewing the Cost of Living Calculation 28 F. The Income Tax Act a Device of Change 29 G. Creating a Stranded Pension Agency 29 H. Modernizing the Regulatory Environment 30 I. Increasing the Year's Maximum Pensionable Earnings Limit 30 J. Reform of the Bankruptcy and Insolvency Act 31 Conclusion 32 Recommendations 33 Schedule A 37 Acknowledgements 39 Disclaimer 39 7
Introduction Prior to the Great Depression, most Canadian social services were delivered by a patchwork of religious, volunteer and charitable organizations. From a historical perspective, the notion of state-sponsored unemployment, pension or health services initially took root following the end of WWI with limited programs such as the Old Age Pensions Act established by Mackenzie King s Liberal Administration as early as 1927. Today, despite the relatively short history associated with the existence of social programs such as Old Age Security, the Canada Pension Plan (Quebec Pension Plan in the Province of Quebec) and the Guaranteed Income Supplement/Allowance, many Canadians view them as defining elements of the national identity. Today most Canadian seniors are eligible for Old Age Security, a taxable monthly social security payment. Additionally, most former workers can receive Canada Pension Plan ( CPP ) or Quebec Pension Plan benefits ( QPP ) based on their contributions during the course of their careers. Noticeably absent from CPP and QPP coverage are the millions of stay-at-home parents that care for the young. As well many people have a private pension through their employer and millions take advantage of government tax-shelters such as the Registered Retirement Savings Plan or the Tax Free Savings Account. Others save through non-tax assisted plans. On paper it may seem as though Canada has already addressed the challenges presented by an aging population through the utilization of a range of public and private mechanisms. Despite this apparent resolution, retirement income security, adequacy and coverage continue to be a looming problem that requires the immediate attention of the business community, individual citizens and of governments at all levels. The end of WWII may have been when Canada s pension plans took root but, the challenges ahead may outstrip any seen in the past six generations. In the next twenty to thirty years, the Canadian retirement system will face a perfect storm of an aging population with longer life spans; dramatically higher levels of personal debt coupled with lower disposable incomes; and global economic and market instability. Steps must be taken in the short-term if pension security, adequacy and coverage are to be attainable for the long term. 8
The Value of Functioning Pension Systems A strong and reliable retirement income regime is in everyone s best interests. By assuring income certainty during retirement, the nation s workforce is happier and more productive during their working life. Subsequent strain on peripheral social A strong and reliable services, such as the healthcare, welfare and housing retirement income regime is systems is reduced and the population at large enjoys a in everyone s best interests. greater sense of accomplishment for labours provided before their retirement. Moreover, seniors with higher disposable income rates circulate monetary resources throughout the whole of the economy prompting increases in consumer spending rates. It is also worth stating that, economically speaking, the benefits of increased savings opportunities through a more robust pension and savings regime provide direct linkages to job creation, improved national competitiveness and the resolution of inherent gaps in intergenerational equity. This concept is often over-looked in pension reform discussions because political visibility is reduced when compared to more traditional stimulus actions such as infrastructure investment. Despite this, it is reasonable to conclude that increased pension/savings coverage/rates will help the Canadian economy grow while reducing government deficits if structured properly. To appreciate and evaluate the inherent value of our existing retirement income system, one must examine the following components and value of that system: Dignity in Retirement Canadians are known globally as a compassionate and caring people. Despite this, the reality is that poverty remains a factor in Canadian society; particularly in the population over the age of 65. While in general terms seniors incomes have, from a dollar perspective, increased significantly over the past few decades, percentages reported as unencumbered income have been on a steady decline. Rising costs associated with basic living are the primary culprit when determining the rationale behind a stark reduction in unencumbered income levels. Taxes, increased transportation and home heating costs all play a role in the downward trend. It is also important to note that the 2009 Special Senate Report on Aging concluded that, The income system for seniors is said to be composed of four pillars: the Canada Pension Plan or Quebec Pension Plan (CPP/QPP), employer-sponsored pensions, Old Age Security/Guaranteed Income Supplement (OAS/GIS) and private income from 9
earnings and savings. The report went on to say that, Canada s income security system for seniors has resulted in the lowest incidence of low income among all developed countries. Our existing social programmes are designed to ensure that most seniors in Canada do not live in abject poverty. However, many are living in circumstances that detract from their dignity and enjoyment of life. This is particularly true for those Canadians who have been employed at low to middle income levels throughout their careers and/or have no workplace pensions. To provide an overall roadmap of where Canadians want their retirement income security system to be in the future, the Working Group recommends that the Liberal Party of Canada introduce a formal Retirement Income Bill of Rights to explicitly recognize four key ideals as they relate to retirement income security coverage and adequacy. i. That a strong retirement income system is essential to the well-being of citizens and permanent residents of Canada and the overall health of the Canadian economy; ii. iii. iv. That the Canadian retirement income system is built on a combination of government programs, workplace plans and individual savings; That Canadians have the right to a retirement income system that promotes the goals of transparency, affordability, equity, flexibility, self-reliance, security, and accessibility; and That these principles should be enshrined in a Bill of Rights which shall reflect the respect of Parliament for its constitutional authority and which shall encourage the protection of these principles in Canada; Proactive Planning Retirement security issues cut across provincial/federal jurisdictions and are often the source of confusion between various levels of government. Moreover, practitioners in the pension industry would generally agree that the problems with the current systems are complex, technical and require a long-term approach. Governments have limited resources and technical expertise to address problems of this nature. A group of neutral dedicated experts with credibility in the industry is needed to analyze these issues, determine which reforms are needed, make specific recommendations for change, and help facilitate the said recommendations. The establishment of an agency to do the heavy lifting on advancing pension reform would permit governments to acquire 10
the ability to tackle these challenges proactively. A permanent agency, with a mandate as described above, making regular reports to governments, would serve to keep retirement issues in the forefront, even when no crisis is present. The working group recommends the establishment of a joint federal/provincial agency with a mandate to critically assess the various solutions proposed for the current system on a pan-canadian basis; and would provide a framework in which solutions to the challenges facing the Canadian system could be co-ordinated. The agency s focus would be to serve as a foundation for a stronger retirement system by helping governments identify problems before they reach crisis proportions. Implications on the Public Purse The expression pay now or pay later has often been used in relation to retirement income security, coverage and adequacy. If Canadians fail to proactively make preparations for retirement, other social systems will be required to take up the slack. For example, a clear linkage between poverty and ill health has been established by the medical community. It is therefore reasonable to extrapolate that seniors living in poverty will place a greater demand on the healthcare system than would a senior living far above the low income cut-off. Likewise, if a senior is unable to remain in their home as a result of faltering income, public housing or publicly funded nursing homes may become their only option; an unnecessary cost borne by all taxpayers. Put another way, while there may be a cost to shoring up a national pension and retirement income strategy, it is reasonable to believe that the costs associated with ignoring the problem will outstrip this cost well in advance of the year 2036 the year in which Canada s population over the age of 65 is expected to reach 10.9 million. With this in mind, the Working Group recommends that the Liberal Party of Canada issue an immediate statement identifying retirement income security, coverage and adequacy as an area of policy deserving of urgent national attention. The same statement should announce that the next platform of the Liberal Party of Canada will contain concrete measures aimed at addressing the long-term sustainability, security, coverage and adequacy of Canada s pension and retirement systems. International Competitiveness Canada s strong social safety net, including the CPP, gives Canada a competitive edge when it comes to attracting new foreign business initiatives in Canada. The existence of benefits such as the CPP/QPP, the OAS and the GIS can be leveraged to lower the 11
operational and employee costs that are traditionally borne by the employer in jurisdictions without access to similar retirement benefits. While this competitive advantage is often discounted by the current government when showcasing the Canadian business climate abroad, there are elected officials who have taken extraordinary personal steps to showcase the many benefits and advantages presented by the existence of these systems within the country. One such example would be when, on September 30 th, 2009, Liberal Member of Parliament Dr. Carolyn Bennett testified before the US Special Senate Committee on Aging to defend and promote Canada s healthcare system. The Working Group recommends that the Liberal Party of Canada take all steps necessary to ensure that Canada s social safety net, particularly the CPP/QPP, is highlighted as a competitive advantage not offered in various other global jurisdictions. Intergenerational Equity Intergenerational equity is an economic concept that refers to the notion of relative fairness in relationships between successive generations, particularly in terms of treatment and interactions. In the context of institutional investment management, intergenerational equity is the principle that an endowed institution's spending rate must not exceed its after-inflation rate of compound return, so that investment gains are spent equally on current and future constituents of the endowed assets. Put another way, increasing net pension liabilities in a way that would require future benefactors to bear an unbalanced proportion of the costs so as to provide enhanced benefits in the present would violate the principle of intergenerational equity and potentially put the long-term sustainability of an existing pension plan at risk. Recently there have been many proposals put forward by various sources suggesting increases to the rate at which the CPP retirement benefit is paid to pensioners. For example, the Canadian Labour Congress (CLC) has urged an increase in the minimum retirement income floor. The CLC suggests that, based upon their calculations, a 41 year old with an annual income of $61,965.00, would receive an additional $6,898.00 per year upon retirement under their proposal. While this is obviously a desirable outcome in that it places more money in the hands of the said pensioner, when gauged against the anticipated inversion of Canada s population pyramid, the CLC plan may violate the notion of intergenerational equity unless a lengthy implementation delay was included in the proposal. While violating the principles of intergenerational equity may seem an easy resolution to certain shorter-term political objectives, the unintended consequences of the action may 12
undermine the very stability of the CPP; something that would clearly be inappropriate, short-sighted and damaging to the larger goal of attaining pension and retirement income security, coverage and adequacy for all. The Working Group recommends that the Liberal Party of Canada seek to strictly adhere to the notion of intergenerational equity. Policies adopted by a Liberal Government should be designed to ensure that one generation is not asked to pay a disproportionate share of the costs. Partnerships As with many social programs in Canada, retirement benefits such as the Canada Pension Plan are funded, administered and/or delivered with the involvement, oversight and/or assistance of multiple partners. Given the complexities and legislative/regulatory basis for these partnerships, policy alterations must be respectful of applicable Constitutional, conventional and jurisdictional concerns. It is therefore understood that regular and meaningful communication and collaboration between governments is an essential ingredient in the pension reform process. It is also understood that partners may have differing financial limitations and policy objectives that would become relevant during any review process. With this reality in mind, the Working Group is seeking to introduce measures that address pension security, adequacy and coverage in policy areas falling under the exclusive auspicious of the Parliament of Canada and, on matters of interjurisdictional application. Past efforts, such as the creation and maintenance of the Canada Pension Plan prove that success is possible; even when faced with tremendous obstacles. The CPP is a national pension plan that was enacted by a minority Liberal government under the leadership of Prime Minister Lester Pearson. At the time, the opposition was profound and the reasons not to take action were numerous. Despite this, federal and provincial authorities were brought together and, as a result, one of Canada s most important social programs was born. The CPP is a prime example of a federal/provincial success story that should serve as a model to the current political leadership around the First Ministers table. The Working Group recommends that a new federal Liberal administration seek to convene a First Ministers Meeting within 90 days of taking office with the singular goal of implementing a comprehensive national strategy predicated on the concepts contained within this White Paper while also respecting the legitimate financial limitations and policy differences of the provincial and territorial partners. 13
Revisiting the Three Pillars of the Canadian Retirement Income System Canada has long prided itself on the success of its current pension systems. The three primary mechanisms associated with that system are: Old Age Security/Guaranteed Income Supplement; the CPP or QPP; and the various privately sponsored tax-deferred plans. Notionally, a fourth pillar would comprise private savings outside of tax-assisted plans, an increasingly important pillar for well-to-do Canadians. These structures have provided a strong base, however they may now face new pressures as the national population continues to age over the next twenty to thirty years. Weaknesses must be purged and strengths should be expanded upon. Numerically, for most Canadians earning the average industrial wage, the three pillars mean the following: Old Age Security / Guaranteed Income Supplement. The Government of Canada defines the OAS pension as the cornerstone of Canada's retirement income system It goes on to suggest that the OAS will provide a modest pension at age 65 if basic minimum residency requirements are met. As of June 2010, the maximum OAS benefit possible under the Act is $516.96 per month but the Canada has long prided itself on the success of its current pension systems. The three primary mechanisms associated with that system are: Old Age Security/Guaranteed Income Supplement; the Canada Pension Plan; and the various private plans and privately administered options. These structures have provided a strong base, however they may now face new pressures as the national population continues to age over the next twenty years. average pension currently being paid is $489.25 per person, per month. This represents an average income of $5,871.00 per person, per year. Also available under the same legislation is the Guaranteed Income Supplement ( GIS ). The GIS is defined as additional support extended to low-income seniors living in Canada. To be eligible for the GIS benefit, one must be receiving the Old Age Security pension and meet specific low income requirements. The maximum monthly GIS benefit available to a single person is $652.51 per person, per month but the average GIS benefit currently being paid to a single person is $ $446.61 per person, per month or $5,359.32 annually. It should be noted that pensioners are not eligible for GIS benefits if their income, or the combined income of them and their spouse, is more than the maximum income threshold of $15,672.00 per year. Pensioners with an individual net income above $66,733 must repay part, or all, of the maximum Old Age Security pension amount. The repayment ( clawback ) amounts are normally deducted from monthly payments before they are issued. The full OAS pension is eliminated when a pensioner's net income is $108,090 or above. 14
Canada Pension Plan / Quebec Pension Plan. The Government of Canada established the CPP program in 1966. It is an earnings related social insurance program that provides basic benefits when a contributor to the plan retires or becomes disabled. When contributors die, the Plan provides certain benefits to their survivors. The pension is designed to replace about 25% of a person s earnings from employment, up to a maximum amount (set to approximate the average industrial wage in a given year). Numerically, for 2010, the maximum amount is $934.17 per person, per month or $11,174.04 annually. To qualify for a CPP retirement pension a person must have worked and have made at least one valid monetary contribution to the Plan. There is also a requirement to be at least 65 years of age or between 60 and 64 years of age (there are additional earnings and contributions requirements set out in the legislation for those applicants falling between 60 and 64 years of age). A CPP retirement pension is based on how much, and for how long, one contributed to the CPP, or to both the CPP and the Quebec Pension Plan (QPP). The age at which one chooses to retire also affects the amount payable. The CPP claims to provide security by making certain adjustments before calculating 25% of the earnings contributed over an individual s working life. Every year, the CPP retirement pension is indexed to the Consumer Price Index. The average monthly retirement pension (at age 65) in January 2010 was $502.57 per person, per month. This represents an average income of $6,030.84 per person, per year. The Quebec Pension Plan functions on a similar premise but is mandated only within the province of Quebec. Income from Other / Private Sources. Income from other and/or private sources is traditionally comprised of a number of savings vehicles. Registered Retirement Savings Plans, Tax-Free Savings Accounts, personal bank accounts, interest income, bonds, private pension plans, capital gains and a host of other personal savings and investment options are available to Canadians for retirement planning. In many cases, investing in vehicles can yield substantial tax-savings opportunities. Savvy investors who have taken advantage of compound interest over time and those with employment-sponsored pension plans can expect to retire with a monthly income far in excess of individuals without this third pillar component. Many of these third pillar options are adapting to the current financial realities and emerging government policies. For example, as a result of a concept unveiled in the 2005 federal Liberal Budget, known then as the Prepaid Tax Savings Plan, since January 1 st, 2009, Canadian residents who are 18 years of age or older with a valid Social insurance number are eligible to contribute up to $5,000 annually to a Tax-Free Savings Account (TFSA). The initial amount contributed as well as the income earned in the account (for example, investment income and capital gains) is tax-free, even when it is withdrawn. After just one year in existence, TFSAs accumulated $16 billion in assets 15
and were subscribed to by 4.7 million Canadians; evidence that many Canadians are ready to save when presented with the appropriate savings opportunity. On the other end of the spectrum, introduced in 1957, RRSPs provide a form of deferred taxation to individuals. For the most part, contributions to RRSPs are deductible from taxable income, reducing income tax payable. Since Canada has a progressive tax system, taxes are reduced at the highest marginal rate. Increases in the value of the RRSP assets are not subject to income or other taxes in Canada until funds are removed from the plan. Disbursements from an RRSP are taxable as income at the time of withdrawal. Since an RRSP is intended for retirement (when many taxpayers will have lower taxable income), the tax paid may be lower. All disbursements from the RRSP are taxed at the same rate regardless of the type of income earned while in the RRSP. Effectively, capital gains lose their 50% exemption, and dividends lose their dividend tax credits. Thus, investments that earn interest income are relatively attractive within an RRSP. Since RRSPs allow many taxpayers to substantially defer and reduce income taxes payable, there are limits on maximum allowable contributions, timing of certain contributions, and other restrictions. 16
The Integration of Existing Systems It is essential that the existing retirement system be considered holistically and with a multigenerational focus. Public and private structures should be integrated with the stated goal of providing more seamless coverage to both the main-stream and any marginalized populations. Consideration must therefore be given to those who have traditionally been illserved by the system. Women, in particular, statistically endure a greater rate of poverty, and should receive the attention needed to ensure their retirement income security, adequacy and coverage remains on par with that of all Canadians. Canadian retirees are headed for a sizable financial shortfall during their retirement years. When actually combined, the aforementioned three pillars serve Canadians well. Unfortunately, the reality is that for millions of our citizens, only the first 2 pillars can be relied upon. While the vast majority of Canadians who meet the legislative requirements make application for the OAS/GIS and the CPP/QPP, according to a Statistics Canada report released on May 25 th, 2010, seventy-five percent of private-sector employees in Canada did not have a registered pension plan at the end of 2008. To this woefully inadequate pension coverage statistic, one must consider the rising debt loads of Canadians that offset any private savings they might have accumulated. Even more disturbing still is the fact that many Canadians believe they will be able to comfortably retire by relying solely on CPP/QPP and the OAS/GIS as their sole sources of income. In short, the vast majority of our fellow citizens are failing to save adequately for retirement. For example, the Canadian Institute of Actuaries estimates that a senior one-person household would spend the same average $24,909 it did in 2003 (adjusted for inflation) and a retired couple would spend $43,717 on basic living expenses (food, shelter, clothing, transportation, health care, energy and taxes). After accounting for how much of these expenses will be covered by OAS, CPP/QPP, the Institute calculates how much of the shortfall must be supplied by a combination of retirement savings and home equity. The authors conclude that a single person earning $40,000 needs to save 14% to 20% of annual earnings to cover non-discretionary expenses in retirement (not including home equity). A couple with a combined annual income of $80,000 needs to save 12% to 18% of their earnings. Despite the limited financial security provide by the OAS/GIS and the CPP/QPP, without effective utilization of the third pillar, Canadian retirees are headed for a sizable financial shortfall during their retirement years. There is also a growing understanding of the difficulties associated with realizing pension security, adequacy and coverage for certain marginalized groups. Women, those with lower levels of formal education, the sick, those struggling mental illness, new Canadians, aboriginal 17
Canadians and those living in rural and remote regions are known to endure higher levels of poverty within the population over the age of 65. As evidence of this, on April 14 th, 2008, Economist Michael Veal testified before the Senate of Canada s Special Senate Committee on Ageing. He stated, The groups experiencing deep poverty as seniors are basically three. One group includes immigrants who do not yet qualify for the Guaranteed Income Supplement. The second group is seniors who have dependent children, in some cases grandchildren or disabled children they support. The third group is people who do not take up GIS even though it appears from the data that they qualify for GIS. We do not understand why that is so, that is an empirical puzzle with important consequences. The Working Group recommends that the Liberal Party of Canada strive to maintain and enhance all four pillars of the existing national retirement income security regime while, at the same time, working to implement measures designed to encourage Canadians to avail themselves of the various 3 rd pillar private retirement savings options. Special attention should be given to marginalized segments of society such as women, those with lower levels of formal education, the sick, those struggling with mental illness, new Canadians, aboriginal Canadians and those living in rural and remote regions so as to ensure their retirement income security coverage and adequacy. Further considerations should be extended to those with low unencumbered income who may not be otherwise capable of saving additional retirement resources. All Canadians should have the ability to live above the poverty line regardless of their age or circumstance. Further considerations should be extended to enhancing the existing CPP. Attention should be given so as to ensure changes are enacted in phases; giving weighty consideration to the impact any change may have on the national fiscal framework. 18
Specific Reform Options In addition to the recommendations of a general nature already articulated herein, in keeping with the holistic and fiscally prudent themes advanced in this document, the Working Group recommends additional, specific changes that should be undertaken once a Liberal administration begins its work, to ensure Canada s retirement income system is fortified to withstand the challenges of the next three decades. Any changes should be implemented in a manner that is mindful of the resulting impact they may have on Canada s national fiscal framework. These specific reform proposals are: To address pension coverage and pension adequacy A. Establishing a Supplemental Canada Pension Plan (SCPP). Canadians have come to trust the Canada Pension Plan (CPP). The CPP is widely seen and accepted as a safe and dependable retirement savings vehicle. The establishment of a voluntary SCPP, managed within the existing CPP governance and regulatory structures, would build upon that trust while allowing Canadians to set aside extra, when possible, in a vehicle that promises a return. Moreover, an SCPP would also permit small to medium sized employers to offer employee pension contributions without the administrative or underwriting expenses associated with traditional pension plans. It is also important to underscore that the proposed SCPP will provide individualized asset protection from third party creditors hence offering an added level of assurance that resources placed within the plan during pre-retirement will be available for Canadians during their retirement years. This component is a key factor in the SCPP s conceptual foundation; that all Canadians, regardless of employment status, gender, age or other similar factors, will have equal access to a secure and reliable pension vehicle. Background On December 8 th, 2009, the Leader of the Liberal Party of Canada announced that he was committed to the creation of a voluntary Supplemental Canada Pension Plan (SCPP), as one of the measures a future Liberal government would adopt to enhance and expand universal pension coverage in Canada. (The SCPP would also provide a mechanism to implement another Liberal policy objective, the creation of a mechanism to deal with "stranded" pensions of insolvent pension plans.) Given the variations on the concept of a government sponsored tax-deferred savings plan made by a variety of parties and interest groups, it is important for the Liberal Party of Canada to further define the elements of its SCPP policy, while at the same time maintaining flexibility with respect to implementation details. 19
General Principles and Objectives As stated elsewhere in this report, many pension experts in Canada believe that the middle-class is generally ill-prepared for retirement. Others suggest that, while the income replacement rate of lower-income Canadians is relatively high, the absolute dollar pay out from public pension plans (CPP, Old Age and Guaranteed Income Supplement) is too low. It is generally thought that the best type of pension plan for Canadians is the defined benefit registered pension plan ("DBRPP"). The DBRPP offers tax deductions to the employer and employees; offers tax deferral on assets contributed to the DBRPP; and because of economies of scale and professional management, with fiduciary oversight by the DBRPP administrator, provides an efficient way of building up large pensions. While the DBRPP is the pension vehicle of choice of large employers, public servants and large portions of the unionized workforce, it has its disadvantages: it requires expertise that can be costly to secure for a small plan, the funding requirements introduce variability in the financial commitments of plan sponsors and a variety of complex rules subject employers to strict legal duties that divert energies from their core business. Not surprisingly, over the past 20 years, DBRPP coverage outside of the public sector has been declining. Defined contribution plans and Group RRSPs ("CAP") have become increasingly popular as an alternative to DBRPPs, but they have proved to be inadequate savings vehicles because of high fees, inadequate contribution rates and lack of investment expertise. The SCPP policy is an attempt to fill the gap in workplace pension coverage by combining the best that DBRPPs offer with the flexibility and ease of administration found in defined contribution pension plans. As such, the SCPP ought to meet the following general objectives: (i1) (i2) (i3) Provide a vehicle that promotes enhanced pension coverage; Provide ease of administration for employers/employees who opt into the SCPP; Provide safeguards to ensure fiduciary oversight of the contributed assets without placing a burden on the employer; 20
(i4) (i5) (i6) (i7) (i8) (i9) Provide a pension plan that maximizes the opportunities for Canadians to save when they move from employer to employer or spend time as selfemployed or unemployed individuals; Minimize the impact on the existing retirement income system; Minimize the impact on the public treasury; Respect constitutional division of power; Encourages competition and cost-cutting in the provision of pensions; and Provides a benefit that is relatively predictable. Key Features of the SCPP Enrolment All employed and self-employed adults 18 to 71 (or greater age if tax laws permit) currently enrolled in the mandatory Canada Pension Plan should be eligible to join the SCPP. Terms of the employment contract situation Enrolment would be mandatory in cases where the employer, as a term of the workplace employment contract, opted to have the SCPP as the pension plan of the company. Employees in such settings would not have the option of opting out. In that scenario, employers would determine the amount of contributions payable by the employee (a term of the employment contract) and employers would have to, at a minimum, match the employee contribution or provide up to 100% of the total contributions made for the employee to the SCPP. Excluded Employers Where Plan Already Exists Where the employer already provides a registered pension plan (either a defined contribution plan or a defined benefit plan or a hybrid of the two) the employer could elect to be considered an excluded employer and opt out, for itself and its employees, of the SCPP. It may be useful to also exclude employers that offer participatory Group RRSP plans. 21
Employees Participation Where the two categories above are not applicable, and for self-employed individuals, there would always be the option of voluntarily contributing to the SCPP. To do so, these individuals would simply check a box at hire time when they fill out their Federal Personal Deductions Form. For existing employees, a website would be provided by the SCPP administrator where they would enter their SIN, the Business Number of their employer, their name, age, percentage of earnings to be contributed and spouse's name (or designated beneficiary) and the employer would receive a notification from the Canada Revenue Agency that a variety of employees tracked by their SIN are requesting to be added to the SCPP payroll deductions. Employer Participation All employers who are not considered exempt would then join the SCPP as participating employers in either one of two categories: Payroll Processor or Contributing Employer. Management The SCPP would be managed and administered, whenever possible, within the existing CPP governance and regulatory structures so as to avoid systemic duplication, administrative confusion and unnecessary cost additions. Payroll Processors are employers who have opted to not contribute financially to the SCPP for their participating employees. We anticipate that most very small employers with less than 5 employees would opt to become payroll processors. Their role would be limited to deducting from pay the contribution figures selected by the employees. They would have no fiduciary obligations (besides deducting and remitting), and would not be required to maintain any other information about the SCPP. They would not be required to provide education to members about the SCPP. The law would shield them from lawsuits. Contributing Employers are employers who, in addition to being Payroll Processors, have voluntarily opted to contribute to the SCPP and will make a contribution ranging from 1% to 100% of the maximum contribution allowable under the Income Tax Act (Canada) for money purchase plans. Employer contributions would be deductible from the employer's income in the year of the contribution. 22
Contributions Overall Limit Contributions to the SCPP would be integrated with the existing Income Tax Act (Canada) rules and treated as a substitute to a money purchase contribution for defined contribution pension plans. It would thus be limited to 18% of income or the money purchase limit in a given year (whichever amount is less). This is to prevent double-dipping with RRSP contributions and to preserve fiscal revenues. In other words, a contribution of $5,000 for example, to the SCPP would reduce the RRSP limit of the employee by $5,000. Defaults Unless employees and employers participating in the SCPP specify otherwise in their enrolment forms, the standards contribution rate would be: 9% of the base-pay of the employee as the employer contribution 9% of the base-pay of the employee as the employee contribution The defaults are set at the highest possible level to indicate that the Government of Canada is prepared to offer tax-deferred treatment to the full extent of the law. As these are voluntary contributions, it is anticipated that Canadians contributing to the SCPP would specify lower percentages in keeping with their own budgets. The website of the SCPP would provide illustrations of what various percentages of contributions would yield in terms of supplemental CPP pensions assuming certain assumptions. Additional voluntary contributions Employees would also be entitled to make Additional Voluntary Contributions (AVC), in addition to any contribution mandated by the employer. These AVCs would only provide a tax deduction up to the global money purchase limit in the year of contribution. They would grow in a tax-deferred manner and would be accounted for separately from regular, locked-in SCPP contributions. 23