How Ontario can create an effective public pension plan

December 18, 2014

As Ontario begins work on an expanded public pension plan, the case for a comprehensive public plan couldn't be clearer: the private sector is not delivering retirement security to most Ontarians.

Only one in four private sector workers belong to a workplace pension plan.

And we know that financial services companies who offer RRSPs aren't doing the job either.

A generation ago, the best predictor of being poor was simple: you were a senior. We decided as a nation that we weren't going to tolerate seniors' poverty, so we created a federal public pension system — including Old Age Security and the Canada Pension Plan (CPP).

Today, we can go a step further and make a collective decision to provide the next generation of workers with retirement security.

We have learned that it won't work to rely on the private sector.

We have learned that government leadership can help us work together to save for retirement. Because, retirement savings is one of those things we are better off doing together than on our own.

The design of the CPP is our shining example of why that works: it has low administrative costs, high investment returns and low investment management fees.

It protects against the risk that a weak stock market could scupper anyone's individual retirement savings.

It protects against the risk that you will outlive your retirement savings.

The CPP needs updating, but the federal government has made it clear it has no interest, despite the provinces' request to start negotiations. In the absence of federal leadership, Ontario has proposed an Ontario Retirement Pension Plan (ORPP).

It's the right idea. Action is warranted because the nature of Ontario's increasingly precarious labour market means young workers are especially vulnerable to job hopping, having to hold down multiple part-time jobs or getting by on self-employment. Permanent jobs are few and far between.

Combine a precarious job reality with high student debt and an expensive housing market, and you have a scenario where it is impractical to expect this generation to be able to rely on individual savings for their retirement security.

Done right, the ORPP can increase retirement security despite these obstacles.

To make the Ontario plan most effective, it should mirror the design features of the CPP.

The Ontario government's current ORPP proposal would deviate from the CPP by excluding people with comparable pension plans from the ORPP. That would be a mistake. The ORPP should include all workers — those who already have workplace pensions plans and those who don't.

Leaving some workers out of the public pension plan would make it more complex and expensive to administer. And it would diminish the ORPP's power to provide retirement security that comes from providing a pension based on income from all of the jobs you have over the course of your working life.

Finally, concerns have been raised about the potential for the ORPP to be unfair to low-income seniors: that they could contribute to the plan during their working life only to have their federal Guaranteed Income Supplement (GIS) payments clawed back as a result of income from the ORPP.

If concerns about the potential impact on low-income seniors would be a barrier to expanding public pension coverage, there is a solution: supplement the ORPP with a targeted, refundable tax credit for low-income workers. This would offset their contributions to the ORPP.

Advice to policy-makers: don't try to figure out how to exclude low-income workers from participating in this powerful pension plan. Don't deviate from the design of the CPP, which covers all earnings above $3,500 a year.

The CPP approach would maintain pension plan membership for people who are temporarily earning low incomes because they are just starting their working life or for other reasons, like child- or elder-care responsibilities.

Keep it simple. Mirror the CPP. Make it portable and comprehensive.

Give the next generation the same chance for secure retirement that their parents and grandparents got.

Sheila Block is a Senior Economist at the Ontario office of the Canadian Centre for Policy Alternatives (CCPA). Economist Hugh Mackenzie is a CCPA research associate. Both are pension experts.This piece was originally published in the Toronto Star