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New Report Evaluates Big CPP Proposals

Posted by on Oct 26, 2010 in Retirement | 0 comments

A new report by Jonathan Kesselman, Canada Research Chair in public finance at Simon Fraser University in Vancouver compares all the key pension reform proposals on the table, concludes that a bigger CPP, with a mandatory increase in premiums as well as benefits, is the hands-down best choice.

As reported in a Globe and Mail article, Professor Jack Mintz who heads the School of Policy Studies at the University of Calgary said,“If there was some enhancement of CPP, I think I could buy that.”

Mintz is known for his skepticism about government meddling in retirement planning. He has championed more flexibility for private-sector solutions. And he wrote a pivotal paper for the federal and provincial governments a year ago concluding that Canada’s system was working well and not in need of major reform.

Nevertheless, Prof. Mintz now says he recognizes that many Canadians, especially those with low or medium incomes, don’t want to take risks with their money and invest hard-to-find savings in market instruments. He also sees company after company abandoning defined-benefit pension plans for their employees, leaving them vulnerable in their retirement.

“I’m very concerned about this movement away from defined-benefit plans. It’s really important to have that as an option for people,” he said.

In an earlier article, the Globe and Mail cited an exclusive interview with  Finance Minister Jim Flaherty after his meeting with G20 counterparts.

Flaherty played down expectations of a wide-ranging deal on pension reform this fall, acknowledging he’s not sure Ottawa has the support of enough provinces to move ahead with changes to CPP.

“This is not something that will happen quickly,” he said. “We have to first of all agree on where we’re going and make sure everybody’s happy with that. We already have at least one dissenting province and as you know there’s a quota rule in there, and I don’t know what the position of Quebec is.”

The article abstract is reproduced below:

Current and growing deficiencies in many workers’ ability to maintain their accustomed livingstandards in retirement have evoked varied proposals for reform of Canada’s retirement incomesystem. This study focuses on proposals for expanding the retirement benefits of the Canada Pension Plan (CPP), and undertakes comparative analysis with proposals for reforms affecting workplace pensions and individual savings.

It begins by reviewing key policy questions for the retirement income system and describing essential features of several proposals for CPP benefit expansion. It then uses these “Big CPP” proposals as a basis to assess the design issues for expanding CPP benefits and the implications for other components of the retirement income
system.

The paper assesses each of the major private and public savings vehicles based on multifaceted criteria for a well-performing retirement income system; a mandatory public scheme with defined benefits ranks most highly on almost all criteria other than individual flexibility. Additional behavioural and institutional factors also support the use of mandatory public pensions: myopiain savings, individual investment behaviour, scale economies and costs of fund management, adverse selection and annuitization costs, the Samaritan’s Dilemma, and labour market
incentives.

The study provides an overview analysis of key design issues for the expansion of CPP retirement
benefits. Major issues include the desirable scale of expansion for both the percentage of
insurable earnings and the insurable earnings ceiling; mandatory versus voluntary coverage and
options; the allocation of investment return risk; and the phasing-in of higher premiums and
benefits.

The study then assesses the implications of CPP expansion for other components of the
retirement income system: Old Age Security and the Guaranteed Income Supplement, workplace
pensions, tax provisions for savings, and individual savings. A Big CPP fits well within the overall
retirement income system, with other components adapting to the increased CPP benefits over a
long phase-in period. Alternative reform proposals relating to the regulation of workplace pensions
and new voluntary supplemental or multi-employer pension schemes are potentially useful but no
substitute for the expansion of CPP benefits.

Mandating employers to offer adequate pensions could be an alternative to a Big CPP but without all the same advantages. In summary, diverse empirical and analytical considerations support the expansion of CPP retirement benefits as the centrepiece of pension reform to achieve benefit adequacy for all retirees

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