Mandatory Ontario pension plan unnecessary

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Appeared in the Financial Post

The Ontario Liberals recently introduced legislation to create a mandatory government pension plan modelled after the Canada Pension Plan. The legislation, originally sketched out in their pre-election budget, is based on the faulty assumption that most Ontarians are not adequately prepared for retirement.

In reality, the existing retirement income system serves the vast majority well. Among the current cohort of retirees, the problem mainly affects single seniors living alone with minimal work history. The Ontario Retirement Pension Plan does nothing to help this group.

If implemented, the ORPP would result in an additional 3.8 per cent payroll tax on Ontarians earning up to $90,000—almost double the current contribution maximum of $52,500 under the Canada Pension Plan. Those already in “a comparable workplace pension plan” would be exempted.

Putting the $3.5 billion payroll tax hike aside, the ORPP won’t increase overall retirement savings to the extent expected if Ontarians simply save less voluntarily in response to increased forced savings. Without an overall boost in retirement savings, the end result is a reshuffling, with more money going to forced savings and less to voluntary savings.

The risk, then, is that Ontarians will lose out on the flexibility of voluntary vehicles like RRSPs, which can be used for buying a home, obtaining skills training, withdrawing in case of a terminal illness, and fully transferring assets to a beneficiary upon death.

Finance Minister Charles Sousa nonetheless tried to make the case for a looming retirement savings gap, claiming that “a significant number of today’s workers are simply not saving enough to maintain their standard of living when they retire.”

In determining whether a savings gap exists, his government’s analysis only considers retirement income from government programs such as the Canada Pension Plan and Old Age Security. These sources alone fall short of the general guide of providing retirees with 70 per cent of their pre-retirement income.

But Canadians have access to a much larger pool of resources beyond government programs to support them in retirement. For instance, they routinely rely on pension income from RRSPs and RPPs, which are critical features of Canada’s so-called “three pillar” retirement income system. Apart from those, a full accounting of the resources available to retirees must include savings in TFSAs, home equity (70 per cent of Canadians own a home), land, businesses, cash deposits, stocks, bonds, and other investments.

A recent study published by the Fraser Institute found that claims of a looming retirement income crisis typically fail to account for two broad categories of potential support. One comes from the assets held outside of the formal pension system which total $8.6 trillion (including $3.6 trillion in non-financial assets, mostly homes and land). For perspective, Canadians held $2.6 trillion inside the pension system.

Another often ignored form of support to retirees is provided by family and friends. This includes more than financial support through inheritances. Consider that over 10 per cent of seniors live with their families and over a quarter of Canadians are caregivers.

Any analysis that overlooks all forms of support is incomplete.

Three other problems with the Ontario government’s diagnosis must be addressed. First is the claim that a crisis is looming because the majority of workers do not have a workplace pension plan. However, not being part of an employer-based pension plan does not mean you’re destined for low income. Statistics Canada research shows that retirees without such plans actually had higher incomes than those with them. Clearly, Canadians without an employer-based pension plan adapt and respond by increasing the use of other saving vehicles like RRSPs.

A second problem is the claim is that “voluntary savings are inadequate.” Here, voluntary savings is narrowly defined as RRSPs, which the Ontario government argues Canadians underuse. However, RRSP participation is actually much higher when we consider people who have a reason to contribute. According to actuary Fred Vettese, this includes “workers who are between ages 35 and 65, have employment income of $40,000 or more, and do not participate in a workplace pension plan.” Among this group, the RRSP participation rate climbs to 80 per cent and potentially up to 94 per cent.

Finally, the government points to people living longer as the source of a looming crisis. This ignores important labour market changes among older Canadians, many of whom are choosing to work longer despite incentives to retire early. One in four Canadians between 65 and 70 years old now remains in the workforce, up from roughly one in eight just 13 years ago. The delay gives future retirees more time to save resources while also postponing the time they are drawing down their savings.

Put simply, the government’s proposed plan is built on faulty assumptions. Ontarians do not need another mandatory pension program.

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