Prime Minister Elect Justin Trudeau has promised to do what Stephen Harper pointedly refused to do – help Premier Kathleen Wynne implement Ontario’s new pension plan.
But reconciling Trudeau’s long-term vision of enhancing the Canada Pension Plan (CPP) with Wynne’s “ready-to-go” Ontario Retirement Pension Plan (ORPP), could prove tricky.
Trudeau to help on short-term implementation issues
The Conservative government refused to change federal regulations to help establish and collect contributions for the Ontario Retirement Pension Plan (ORPP), which is due to start collecting premiums in January, 2017.
In fact, the pension issue had become a significant point of conflict between the federal Conservative government and the Ontario Liberal government. During the recent campaign, Mr. Harper went so far as to say that he was “delighted” that his decision not to help Ms. Wynne “is making it more difficult for the Ontario government to proceed.”
But what a difference an election makes! The two Liberal leaders had a brief meeting at Queen’s Park on Tuesday and there appeared to be a complete meeting of the minds on the pension issue – at least in the short term.
According to a statement issued after the meeting, the new federal Liberal government will “direct the Canada Revenue Agency and the Departments of Finance and National Revenue to work with Ontario officials on the registration and administration of the [ORPP].”
Registration refers to the fact that unless a pension plan is registered under the terms of the federal Income Tax Act, employee and employer contributions are not tax deductible. Once registered, pension contributions and investment earnings are tax-exempt until benefits are paid to a retiree.
Administration primarily refers to piggy-backing ORPP premium deductions on the existing CPP payroll contribution infrastructure. Ontario had issued a request for proposal for a third party to help administer the plan because of the outgoing Conservative government’s refusal to co-operate. Now it won’t need that third-party partner, which means the ORPP should be less expensive to operate.
The statement also noted that by co-operating in these two areas, the federal government is providing the same support to Ontario that it gives to the Quebec and Saskatchewan pension schemes.
Beyond these first steps in easing the implementation of the ORPP, pension talks between the provinces and federal government will be fast-tracked. In their platform, the Liberals promised that they would meet with the provinces to discuss CPP enhancement within three months of the election. That only gives them until late January to convene a federal-provincial meeting, a tight schedule given the newly elected government’s other priorities.
But the elephant in the room remains the thorny question as how best to reconcile Wynne’s near-term implementation of the ORPP with Trudeau’s longer-term vision of enhancing the CPP.
The decline of defined-benefit pension plans
The context for discussions over the ORPP and CPP enhancement is that private-sector, workplace pensions that have a “defined benefit” (i.e. offer guaranteed monthly cash payments in retirement) have been in decline since at least the 1980’s. This means that working Canadians – particularly those under 50 – are facing a significant retirement savings gap.
With the federal Conservatives in power, the political debate revolved around whether government should make the extra saving required to fill the gap mandatory through a CPP (or ORPP) expansion or encourage Canadians to save more on their own. Individual responsibility, of course, was the preferred choice of Conservative Prime Minister Stephen Harper.
With Liberal governments in power at Queen’s Park and in Ottawa and with the replacement of the anti-CPP Alberta Conservative government with Rachel Notley’s NDP, it now seems certain that some sort of mandatory, public option will eventually prevail.
That said, there are two very different time frames at play here. With the exception of a couple of technical design issues, the details of the ORPP have been pretty much worked out with much of the provincial enabling legislation already passed and a firm starting date of January 1, 2017 established for the collection of premiums from larger Ontario companies.
In contrast, there is no consensus amongst the provinces and the federal government over what a CPP enhancement would look like and past experience suggests that a federal-provincial agreement on the specifics of a possible enhancement will take several years.
When you add an additional year or two to actually implement the changes once there is broad federal-provincial agreement, Canadians are likely looking at the end of the Trudeau mandate (2019) before an enhanced CPP could be implemented and a new premium structure put in place. Again, the ORPP will begin collecting premiums from larger Ontario companies on January 1, 2017.
CPP, ORPP very different benefits
Moreover, the respective pension benefits as now conceived in the two plans are very different making it difficult (albeit not impossible) to simply “roll” the ORPP into the CPP if and when there is a federal-provincial consensus on a CPP enhancement.
For example, the main features of the ORPP are:
- Employees and employers will contribute an equal amount, capped at 1.9% each (3.8% combined).
- Earnings above $90,000 will be exempt from ORPP contributions. The minimum has not yet been set.
- Employers and employees who already participate in a “comparable” pension plan will not be required to participate in the ORPP. This means that members of large public sector plans would not have to contribute. Nor would members of pension plans in the auto, mining and other sectors where defined-benefit plans still predominate.
- There are no provisions in the ORPP to cover the self-employed.
In contrast, the main features of the CPP are:
- The contribution rate is 4.95% each (9.9% combined) for employees and employers.
- There are no exemptions for “comparable” plans as is the case with the ORRP. With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec is enrolled. Quebec has the Quebec Pension Plan which essentially mirrors the CPP.
- In 2015, premiums are paid on a salary range between $3,500 and $53,600.
- The self-employed are covered but pay the full 9.9 percent.
With such different benefits and time-frames in play, aligning the Trudeau and Wynne pension visions is, at best, a long-term project. That said, what are the key considerations involved in a possible long-term reconciliation?
Universality vs. a more targeted approach
The thorniest issue in reconciling the two visions is the question of universality (as embodied by the CPP) vs. a more targeted approach (ORPP). The policy objective that the ORPP seeks to achieve is to provide a defined-benefit pension to the roughly 2/3 of the workforce that lack a workplace pension. The CPP, on the other hand, is a universal benefit whose premiums are paid by all employers and employees, including those already paying into defined-benefit plans (albeit with some provisions for off-sets).
So there is a fundamental difference in the policy objectives being pursued by the two plans.
And then there is the politics.
If governments eventually decide to go the more universal route and propose to significantly enhance the existing CPP benefit, they are likely to face intense opposition from large segments of the business community.
The wall of business opposition faced by Ontario’s ORPP over the past two years is instructive in this regard.
Even with the broader public sector and much of the manufacturing and resource sectors exempted from the ORPP because of the prevalence of defined benefit pensions in these sectors, there has still been intense lobbying (with some success) from Ontario employer and insurance groups seeking further exemptions.
Employer groups (the CFIB and Ontario Chamber of Commerce, in particular) opposed the ORPP on the grounds that, in their view, the employer community in Ontario simply could not afford an additional 1.9% added to their payroll in the form of ORPP premiums.
The powerful insurance industry (fronted by the Canadian Life and Health Insurance Association) opposes any sort of public pension enhancement because it sponsors competing retirement savings vehicles such as Defined Contribution Plans, Pooled Retirement Pension Plans (PRPP’s) and group RRSP’s. The insurance industry has a long history of fierce behind-the-scenes lobbying against public pension expansion going back to its opposition to the creation of the original CPP in the mid-1960’s. The mutual fund industry has taken a similar oppositional stance for pretty much the same territorial reasons.
Should an enhancement of the current CPP benefit begin to emerge as the favoured federal-provincial option, all these business groups plus trade groups representing ORPP exempted manufacturing and resource employers (many of which have underfunded “legacy” defined-benefit pension plans), can be expected to man the barricades in opposition to a proposed CPP premium increase.
In contrast to employer groups and the insurance and mutual fund industries, advocates for an across-the-board expansion of the existing CPP, including the Canadian Labour Congress and the senior’s advocacy group CARP, argue that allowing exemptions in the first place was a policy mistake by Ontario that should now be corrected given the new Liberal government’s desire for negotiations on expanding the CPP.
In strictly policy terms, labour and seniors’ groups are undoubtedly correct – the ideal solution to the retirement savings gap has always been an enhancement of the universal CPP. Whether the pro-CPP forces can carry the day in a monumental political fight with a hostile business community, is quite another matter. The resources business will mobilize to fight a significant CPP premium increase will dwarf anything labour and senior’s groups can muster and governments – regardless of their ideological stripe – tend to listen to the money.
In other words, with most of the hard ORPP policy and political work in the past, it is possible that changing course at this point and putting the ORPP on hold in order to pursue a significant enhancement of the existing, universal CPP benefit would be a classic case of the “perfect being the enemy of the good”.
Low-income Canadians may be hurt
Another problem is that a simple enhancement of the current CPP benefit might actually hurt low-income Canadians if not accompanied by other changes.
Requiring low-income Canadians to pay higher pension premiums will leave them with less money now. Yet in retirement, a higher CPP benefit could trigger a claw back of Guaranteed Income Supplement benefits aimed at these very same low-income seniors.
Ontario is currently struggling with exactly this issue in establishing its own ORPP minimum income threshold under which premiums won’t be collected.
One possible solution is to start new payroll contributions in an enhanced CPP benefit at income above, say, $20,000, rather than $3,500. The downside of this solution, of course, is that individuals earning $20,000 or less would see no benefit from such a CPP enhancement.
The CPP is a joint program of both levels of government. Changes to the CPP require the support of Ottawa as well as two-thirds of the provinces representing two-thirds of the Canadian population. Even if the new, federal Liberal government is able to convene a federal-provincial meeting on CPP reform in January as promised in its platform, agreement between the provinces and the federal government on the specifics of a CPP enhancement will take time – as will the actual implementation of the changes if and when there is agreement.
In contrast, Ontario’s ORPP is well into the implementation stage and is due to start collecting premiums from large corporations on January 1, 2017.
While it is possible (and certainly desirable) for the Wynne and Trudeau pension visions to be reconciled long-term, it is also clear that doing so will be far from easy.