Simulated Replacement Rates for CPP Reform Options

A certain segment of the Canadian population is at risk of being ill-prepared for retirement. These people will likely not have enough pension income when they retire to maintain their current lifestyle. It sounds like a problem that calls for urgent government action. Only, these people are not underprivileged or low-income earners. They are middle- and higher-income earners who lack an employer-provided pension, but presumably have the capacity to save for retirement on their own. Whether we see the fact that many of them do not as a problem for government to solve depends entirely on our view of the role of government. This, ultimately, is what the current discussions about reforming the Canada Pension Plan, boil down to. The trend in the incomes of the elderly is generally positive: compared to the 1970s, retirees are living far more comfortably, with incomes overall showing no obvious signs of distress. And data show that Canadians earning low incomes will be able to largely maintain their current earnings upon retirement, relying on the Canada Pension Plan and other public supports. Those Canadians earning mid-range and higher incomes who also enjoy an employer-provided pension, such as public-service workers, are also well-positioned to be able to largely maintain their working-age lifestyles after retirement. Meanwhile, there is no obvious evidence that the number of workers with employment-related pensions will decline in the future; pension coverage among young workers has been increasing, as has the proportion of workers in the public sector. Expanding the CPP — whether it is using the plan recently proposed by P.E.I., the “wedge” proposal offered by economist Michael Wolfson, or simply doubling the maximum pensionable-earnings room allowed for CPP contributions — would have the largest impact on relatively comfortable workers who are not saving adequately for retirement. In effect, it would force them to save more. But that is not without risks. On a practical level, simply increasing CPP contributions makes the investment decisions of the Canada Pension Plan Investment Board that much more liable for the retirement fate of Canadians. But it also promulgates a philosophy in which the federal government plays an ever-larger role, moving further into parts of our lives that have traditionally been considered areas of personal responsibility. That said, decisions about retirement savings are complicated and irreversible, yet critically important. There will inevitably be at least some people who make poor choices. Whether leaving relatively advantaged workers to suffer the consequences of their own investment decisions, or whether we require government intervention to protect them with an expanded CPP, hinges very much on just how paternalistic we expect our policy-makers to be.