September 15, 2014 - A key topic for Ontarians as of late is pension plan reform. While looming retirement realities seem dismal, the provincial government claims to have a solution. Presented as a step in the right direction, the ORPP professes to provide a reliable, sustainable supplemental pension plan for the province. Although this retirement assistance package has the potential to do some good, economic theorists supported by extensive literature highlight significant design flaws in the ORPP that need to be meted out prior to implementation if anyone is to truly benefit. In light of these assessments it is important to determine whom the ORPP actually serves, where does it fall short, and would it prove harmful to those it is intended to help?
When further examining this supplemental retirement strategy it is reasonable to begin by uncovering the positive aspects of the ORPP; who benefits? The answer is short and to the point – young, upper to middle income wage earners, aged 20-30 without work place retirement plans. Currently, the CPP covers earnings up to $52,500. The ORPP would cover a larger range – up to $90,000. This is considered a positive thing and a recent study conducted by Stats Canada suggests that those in middle-income ranges have the highest percentage of people whose retirement income does not match what they earned when working. The reason why this range is so specific is due to the fact that the plan doesn’t pay out its first full benefits until 2059, by which time the baby boomers, the youngest whom were born in 1965, will be well past the age of retirement. Before then, anyone who falls into that group of workers without pension plans will get a pro-rated benefit. According to officials in the Finance Ministry, older workers will get smaller payouts that reflect what they have paid into the plan, meaning the biggest benefit of the scheme would be to Ontarians who have decades of working years ahead of them.
Unfortunately, the ORPP injury list is lengthier. The first cohort to take a direct hit is the employment sector, primarily employers and employees of small and medium sized businesses that currently have no work place pension mandated. According to the Canadian Federation of Independent Businesses (CFIB) the retirement pension plan would cause Ontario’s unemployment rate to go up to 6.7% by 2020 – from a status quo projection of 6.2% without ORPP. Despite the fact that jobs would be recovered in the long-run, they would return at a lower wage. CFIB’s past modeling of the ORPP impacts revealed that the employees-side of the payroll tax increase would have relatively small net impact on economic performance. Employees basically keep their own money – with their use of it simply shifted from one time period to another. It is the employer side of the payroll tax that does the bulk of the economic damage. Unlike with employees, employers are not given the money back later – it’s a transfer. Employers pay people based on the worth of their production. Whether payments are for current salaries or future pensions, it makes no real difference to the employers because the money is paid out either way. Faced with mandated extra payroll cost, with no extra production value accompanying it, businesses must make adjustments. The short-term results are found in the job market, while the longer term ones are seen in wage levels.
Next up to draw the short stick under the proposed ORPP are the low income wage earners. At this point, the provincial government has not decided upon a minimum amount to opt out of the mandatory plan, but the CPP minimum of ($3,500 per year) has been put forth. This would mean that the ORPP as presently designed is a not only a poor choice, but a potentially harmful one. This is due to the fact that there better existing policy options that offer shelter for this wage category in old age. Under current federal benefits like Old Age Security and the Guaranteed Income Supplement, low income earners tend to do as well in retirement as when they would have when they were working. Kevin Milligan, a professor at UBC’s Vancouver School of Economics and author for Maclean’s feels that for those who are struggling in the labour market with lower earnings, the ORPP would take money away from them now when they are struggling and not give it back to them until retirement when they struggle less. Milligan further states that it would be better if no one has to struggle at all, but forcing people to save more through ORPP at times when they are doing poorly is not a great solution to that problem of lifetime low earnings. It appears that under the ORPP things get even worse for people in this demographic: those who are low income wage earners often receive the Guaranteed Income Supplement in retirement. These federal benefits received in retirement will reduce these government benefits by about 50 cents on the dollar. The results of this being that lower income wage earners would only receive half of their ORPP contributions back when they retire because of pension claw backs. In the end, they pay for a whole pension and only receive half of it back.
As briefly touched upon above, there are two categories of the employed population which are completely left out of the tentative Ontario benefit plan altogether; the wealthy, and those already enrolled in a work place pension plan. From the perspective of these two populations this early draft of the ORPP serves no purpose. After a thorough exploration of this retirement scheme it is clear that as it is presented, the proposed ORPP is indeed limited in scope, falls short in critical areas, and even has the potential to do harm to those in the Ontario populace whom are most vulnerable. In order to counter some of these adverse side effects the ORPP needs to be restructured and the earnings coverage threshold needs to be reconsidered. It is yet to be agreed upon publicly whether or not the supplemental pension plan should be mandatory or voluntary, and the provincial government has thus far not addressed the issue of portability. Instead of taking a costly step in the right direction, it would serve Ontarians better to be able to take a calculated, but confident stride into retirement.
Authored by Cheryl Reid, Policy Analyst with Northern Policy Institute (Thunder Bay)