How to get Canadians to save enough for retirement

Are new or expanded public pensions the solution?

Gail Bebee 20 March, 2015 | 5:00PM
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With no expanded Canada Pension Plan in sight, the Ontario government recently decided to forge ahead with its own mandatory pension plan. Dubbed the Ontario Retirement Pension Plan (ORPP), its stated goal is to ensure that Ontario workers save enough for retirement.

Given the interest of provincial premiers in enhancing the retirement-income system, could ORPP be the first in a series of provincial pension plans across the country?

According to the ORPP draft discussion paper released in December 2014, Ontario's new pension plan will complement and, in fact, mirror the CPP. The final design will be set after review of submissions from the public. Provision for future integration with an enhanced CPP and for expansion to other provinces and territories are among the design considerations. Rollout is set to begin in 2017.

As with the CPP, contributions under the Ontario plan are to be based on a percentage levy on employee earnings. Employees' CPP contributions for 2015 are 4.95% of earnings up to $50,100 (annual maximum contribution of $2,480). The ORPP rate will be 1.9% of earnings up to $90,000 (annual maximum contribution of $1,710). No contributions are payable below a minimum earnings threshold of $3,500. The employer must match the employee's contribution.

There will be no opting out. Funds are to be locked-in until retirement and an organization operating at arm's length from the Ontario government will invest the pooled contributions.

An inflation-indexed pension based on contributions will begin at retirement and continue until the plan member's death. The maximum annual benefit, which is is $12,780 for CPP at the 2015 rate, is estimated to be $12,815 for the ORPP.

While CPP participation is mandatory for most workers, ORPP will target employees who are most at risk of under-saving for retirement, particularly middle-income earners without workplace pensions. The program will exempt those who participate in a "comparable workplace pension plan." This currently includes only defined-benefit and target-benefit multi-employer pension plans, but the definition could be revised based on feedback from the public and employers.

Like CPP, the Ontario plan will exempt low-income workers. Nor will self-employed individuals be covered, due to Income Tax Act rules. The provincial government is exploring options to help the self-employed achieve a financially secure retirement.

The concept of a provincially sponsored pension plan to supplement the CPP didn't originate in Ontario. The long-time pioneer, in fact, is Saskatchewan, which established the Saskatchewan Pension Plan back in 1986. However, the Saskatchewan plan is voluntary for employees and employers, and it's a defined-contribution plan, as opposed to the defined-benefit plan being rolled out in Ontario.

Another distinguishing feature of the Saskatchewan plan is that it is open to all Canadian workers, not just Saskatchewan residents. A member can contribute up to $2,500 per year to the Saskatchewan plan if RRSP contribution room is available.

Independent money managers invest the SPP contributions, which are locked in until retirement. Employers can set up workplace pension plans using the SPP, but they are not obliged to contribute. Given the SPP's voluntary nature, the plan cannot guarantee that Saskatchewan workers are saving enough for retirement.

Elsewhere, a made-in-Quebec pension plan is already in place and could be expanded. The Quebec Pension Plan is the province's equivalent to the Canada Pension Plan offered elsewhere across Canada. Participation in the QPP is compulsory.

QPP employee contributions are slightly higher than CPP at 5.25% (annual maximum $2,630), and employers must match contributions. The maximum pension payable is the same as for the CPP. The Quebec government could address any perceived need for additional retirement savings by simply enhancing QPP, rather than creating an entirely new program.

As for the rest of the country, pension expert Greg Hurst says the other provinces are unlikely to follow Ontario's lead. However, he thinks that some might join with Ontario to create a pan-Canadian provincial pension plan.

Provincial pension plans are one potential solution to address what Hurst says is the growing need for people to save more for retirement. "I think people have saved adequately for retirement in the past, but I am not as sure about the future," says Hurst, the head of Vancouver-based consulting firm Greg Hurst & Associates Inc. "Pension coverage is declining and defined-contribution pension plans may not provide enough income. New rules in some jurisdictions are making it easier for people to raid their defined-contribution pension accounts at retirement, and RRSPs are frequently withdrawn for purposes other than retirement."

The foundation of the Canadian retirement-income system is Old Age Security, the Guaranteed Income Supplement and the CPP. But for many Canadians that will likely not be enough, and they will need to supplement this income with funds from other sources in order to maintain their lifestyle in retirement.

A dwindling number of Canadians can count on a workplace pension to top up these government benefits. Statistics Canada reports that pension membership fell from 33.4% of the labour force in 1997 to 32.5% in 2012.

Furthermore, the guaranteed payout of a defined-benefit pension plan is gradually giving way to the unpredictable income of defined-contribution plans. In these latter plans, a worker chooses how to invest his pension contributions, including the employer portion, and the final pension amount depends on the performance of the investments. The bottom line is that, to have an adequate income in retirement, many retirees will need to draw on personal savings such as RRSPs. Or, perhaps, a provincial pension plan.

Canada's premiers agree that something needs to be done to increase savings for retirement. They've proposed expansion of the Canada Pension Plan/Quebec Pension Plan as one possible solution. To date, the federal government has shown little interest in CPP/QPP enhancements.

The provinces remain hopeful that the federal government will move to expand CPP and solve the retirement funding problem for them. Before this could happen, the question that would need to be answered is whether entrusting so much of the retirement income of Canadians to CPP would be in the public interest.

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About Author

Gail Bebee

Gail Bebee  Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at; her website is

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