WEALTH Matters — Summer 2011

Government Pension Reform

Recently there has been media coverage of various groups calling for an increase in government retirement benefits, including proposals to double the CPP. We believe that the public retirement pension system is adequate and that a mandatory increase in benefits is unnecessary and could be negative for our economy and individual flexibility.

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The Canadian Association of Retired Persons says 1.6million Canadian seniors live on less than $15,000 per year of government support. While this figure may seem very low to someone used to earning $30,000 per year or more, it is all relative to the lifestyle you’re accustomed to. A recent study by University of Waterloo professor Robert Brown looked at the issue from the perspective of avoiding poverty among the elderly, and found that a basic lifestyle costs about $14,000 per year for singles and about $20,000 for couples (and about $2-3000 per year higher than the average in Vancouver and Toronto, the most costly places to live in Canada). The figures are not ‘poverty line’ figures, but are the average actual living costs for people who don’t own a home, cook their own meals, use public transit, and live a socially inclusive but basic lifestyle. People who own their own home actually have lower costs.

Government Pension Reform

Interest Rate Trends

Investment Market Commentary

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A single person who never worked or saved anything gets about $14,000 per year tax free, plus refundable tax credits. According to Professor Brown’s study, this would be sufficient to fund a basic lifestyle anywhere but Vancouver or Toronto. A mandatory doubling of the CPP would not help that person, but would force working people to contribute an extra 5% of their income, rather than having the flexibility to pay off their mortgage or other debts, or fund their children’s education first. And unlike an RRSP, it could not be drawn upon during a period of joblessness or illness. It would also force thousands of small businesses to absorb a 5% increase in their total payrolls to fund contributions, likely leading to significant layoffs. We think that if people choose to live a high lifestyle all their life and not save for retirement, that should be their choice – they’ll still be able to retire with a basic lifestyle. If they want more, there are plenty of incentives to save with RRSPs and TFSA plans. We would prefer to see improvements in home care to ensure that seniors with low incomes can afford to get the help they need if they get sick, and an increase to the GIS to protect the most vulnerable seniors.

Canada’s existing government-run public pension system provides for this level of income already. Our public retirement benefits include three programs: the Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). CPP is funded entirely by employee and employer contributions, with benefits depending on how long you worked and how much you earned (and how much you contributed to the plan). OAS and GIS are funded out of the government’s general tax revenues, and the maximum benefits are available to anyone with 40 years of residency in Canada. The table below shows the government benefits for retirees with various earnings histories, and in brackets the percentage of working income replaced. Figures for couples assume both spouses earned the average income.

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Also in this issue of Wealth matters:

Government Pension Reform

Interest Rate Trends

Investment Market Commentary

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