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January 2014
 
 

Enhancing the CPP and QPP: the Debate Rages On!

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By Jacques Lafrance, FCIA
CIA President

As we begin a new year, I’d like to talk to you about a subject that is garnering a great deal of interest in the political arena, in the media, and among virtually all the members of our profession, regardless of their field of practice: should we enhance the Canada Pension Plan (CPP) and its Québec counterpart, the Québec Pension Plan (QPP)?

Has the CIA staked out a position on this question and, if so, what is it? In the fall of 2009, the Institute appointed a task force to look at certain characteristics of government-facilitated plans to allow the Institute to contribute to discussions on expanding and modifying the CPP/QPP. Made up of renowned, seasoned actuaries, this task force published its report in March 2010. The report does not come out for or against expanding the CPP/QPP. In fact, I recall that one of the task force’s members told me that the group had quickly agreed not to adopt a common position on this question, given the members’ highly divergent viewpoints. That said, the report expresses preferences as to the manner in which a CPP/QPP expansion should be undertaken, in the event that this occurs. Although this report is almost four years old, its commentary on enhancements to the CPP/QPP remains relevant.

There is no shortage of organizations and individuals who have weighed in on the question. In general, the opinions expressed are categorical. The arguments for and against enhancing the CPP/QPP can be summed up as follows:

For

  • Due in particular to the decline in coverage of employer-sponsored plans, workers will not receive adequate retirement income and will therefore require improved coverage from government plans. When left to their own devices, workers do not save enough and often make poor investment decisions. Expanding the mandatory universal plan that is the CPP/QPP will provide them with additional income that they can count on.
  • The CPP/QPP infrastructure already exists, and this regime is effective. The contributions and benefits that would result from an expanded CPP/QPP would benefit from economies of scale.

Against

  • Workers’ retirement savings needs vary from one person to the next. Expanding a universal and uniform government-run plan is not the best solution. Studies tend to underestimate people’s retirement savings, since they generally fail to take account of such things as the value of their home.
  • The increase in contributions resulting from enhancements to the CPP/QPP would have an adverse impact on the country’s economy.
  • In many cases, an increase in the CPP/QPP pension would translate into a reduction in the pension provided by the employer plan, producing a negligible net effect.
  • Especially in Québec, there is some scepticism about how well the government plan is managed.

As a background to all of this are some very contrasting visions concerning the state’s role in our society.

There seems to be a broad consensus, however, about how to fund any potential enhancement of CPP/QPP benefits. Indeed, most stakeholders seem to agree on the need to fully fund such an enhancement. More specifically, additional contributions should be sufficient to finance the benefits resulting from the plan’s expansion, so as to minimize any cross-generational transfer.

In addition to supporting this principle of full funding, the Institute believes that it is preferable to carry out any CPP/QPP expansion uniformly across the country. For example, the possibility that Ontario could set up a separate program is not the ideal solution, to be sure. The Institute made similar comments in its submission to the Government of Québec concerning the D’Amours Committee’s recommendation to put in place the "longevity pension".

Some argue that setting up pooled registered pension plans (PRPP)—in Québec, voluntary retirement savings plans (VRSP)—will solve the problem of insufficient retirement savings. In its submissions, the Institute came out in favour of the legislative changes permitting these new instruments, because they will constitute an additional, effective tool for accumulating retirement capital. But the Institute also indicated that other changes are necessary, such as a more conducive environment to maintaining and adopting defined and target benefit pension plans.

The debate is far from over, and the Institute is in it for the long haul. I invite you to join the debate, regardless of your field of practice. The coming months may be a turning point in the future of retirement savings in Canada.

Jacques Lafrance, FCIA, is President of the Canadian Institute of Actuaries.
 

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