Yet another reason the ORPP is a bad idea

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Appeared in the Toronto Sun, May 11, 2016

Despite substantial evidence that most Canadians are saving adequately for retirement, Ontario’s government is determined to push ahead with the creation of a new mandatory pension plan (the ORPP).

Given that most Ontarians are well-prepared for retirement, the ORPP is a solution in search of a problem. What’s more, new research shows that the Canada Pension Plan (on which the ORPP would largely be modelled) is not producing strong investment returns for younger contributors.

There are many reasons to be concerned about increasing forced government savings through vehicles such as the proposed ORPP.

For starters, research suggests such increases are likely to reduce the amount of money Ontarians set aside in private savings, with the net result being little or no increase in total savings.

Why? Because households choose how much they save and spend based on their income and preferred lifestyle. If their income and preferences don’t change, forcing them to make ORPP contributions will result in a reallocation of funds from private savings—which can be drawn from during financial emergencies or passed on to loved ones in the tragic event of early death—to mandatory government savings that don’t have these benefits.

A second major drawback is that despite rhetoric about people not saving enough, the evidence shows most Canadians are preparing sensibly for retirement.

For example, a recent report from Statistics Canada’s former chief economic analyst Philip Cross showed there is no retirement crisis in Canada, concluding that claims to the contrary “ignore the ample resources” available to retired Canadians.

The truth is that a great many people experience the most financial pressure they will ever face when they are younger and trying to buy a house and/or support young children. Given this reality, it is hard to justify taking thousands of dollars each year out of the pockets of working Ontarians just when many need money most.

None of this is to say Canada’s retirement income system is perfect. Unfortunately, a small group of seniors wind up with inadequate retirement income. However, this problem is largely concentrated among single seniors living alone (often widows) with minimal work history.

The problem is the ORPP won’t do much to help this group. ORPP benefit payments will (like the CPP) be based on contributions made over the course of one’s working life. Those with minimal attachment to the formal workforce therefore won’t receive significant benefits.

So if we want to help low-income seniors, the ORPP is the wrong policy tool for the job. Targeted programs aimed at the population in greatest need are more likely to actually reduce poverty among seniors.

Proponents of forced savings plans have tried to counter these arguments by claiming the CPP has consistently produced excellent returns for contributors and that the ORPP (modelled on the CPP) will do the same. But as a recent study found, the CPP provides a meagre return (after inflation) of just 3.0 per cent or less annually for Canadians born after 1956.

Moreover, the Wynne government has mused about using ORPP contributions to finance government spending initiatives. This arrangement won’t necessarily maximize the rate of return on investment for contributing Ontarians.

Given that most Ontarians are preparing sensibly for retirement, the ORPP is largely a solution looking for a problem. Queen’s Park should review the evidence and reconsider its decision to press forward with a new compulsory savings plan in Ontario.

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