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The flaw in Ontario’s pension plan? Paying for it

Let's get one thing straight from the outset. We do not have a full-blown pension crisis in Canada right now. But in another 15 years, watch out. The Canadian Association of Retired Persons (CARP) estimates that 300,000 people over 65 are living below the poverty line. That's bad enough, but the figure could be more than double that by 2030 unless some action is taken.

Pension experts differ on the potential severity of the problem but the demographic and economic trends suggest it could become a very serious social issue.

On the demographic side, we're getting older as a nation. No one disputes that. The combination of a declining birth rate and increased life expectancy make it inevitable. A research paper prepared for the Library of Parliament by Andre Leonard and last revised in 2012 estimates that by 2030 seniors will make up 22.6 per cent of the country's population. That would translate into about 9.5 million people using the study's mid-range population growth projection of about 42 million.

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So we're going to have a lot more old folks with a longer life span. The question is: what will they live on? Private sector pension plans are drying up faster than the Arizona desert in a heat wave. According to Statistics Canada, in 2011 only 38 per cent of all workers had an employer pension plan. Of those, 73 per cent were in defined benefit (DB) plans – the kind that guarantee a specific payout at retirement based on such factors as years of service and income earned. But that was down from 84 per cent in 2001. Moreover – and this is the sticky part – most of those with DB plans work in the public sector – in other words, for governments or their agencies. In the private sector, DB plans have become almost non-existent, replaced by the cheaper but much less predictable defined contribution (DC) plans, which offer no income guarantees.

This combination of an aging population and an eroding pension plan environment has triggered alarm bells at the highest political levels. Many of the provinces implored the late Finance Minister, Jim Flaherty, to address the issue by expanding the Canada Pension Plan, which currently pays a maximum retirement benefit of about $12,500 a year. Mr. Flaherty demurred, saying the additional payroll costs would be detrimental to the country's fragile economic recovery.

That brings us to the decision of Ontario's minority Liberal government to go it alone by proposing to introduce its own plan starting in 2017. It's a bold initiative but whether it will ever become reality remains to be seen, especially now with an election in the offing.

The plan would require employees to contribute 1.9 per cent of their income up to $90,000, with the contribution to be matched by the employer. So the total cost would be 3.8 per cent of eligible salary. In his budget speech, Ontario Finance Minister Charles Sousa said his plan combined with CPP payments would guarantee an income of about $25,275 a year to someone in the top salary bracket.

You have to give the Liberals credit for trying to look into the future and address the looming problem. But the Ontario plan has several flaws that may eventually sink it.

For starters, it would only cover about half the working population. The self-employed, employees of federally regulated companies (e.g. banks), and those who already have employer pension plans would be excluded. The self-employed exclusion is puzzling since these people are included in the Canada Pension Plan (they pay both the employer and employee contributions). The total number of self-employed in Canada in 2011 was 2.67 million, which suggests there must be at least one million Ontarians in that group.

Second, the go-it-alone nature of the Ontario plan could put the province at a distinct disadvantage in job creation and attracting new businesses. That would be mitigated if other provinces adopt similar plans and several are looking at the idea. But if Ontario stands alone, it will add 1.9 per cent to the cost of hiring a new employee in the province – an expense that an employer would not have to fork out in neighbouring Quebec or Manitoba. For a company considering building a new plant and hiring 500 workers, that's a significant extra cost.

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Finally, it remains to be seen how enthusiastic Ontarians will be about the idea of having more money docked from their pay cheques when they go to the polls on June 12. In my experience, most people don't start to worry about retirement savings until they are well into their 40s or even their 50s. Younger people have other financial priorities, from buying a home to paying for their kids' hockey gear. Everyone pays lip service to the need to save for retirement but the shockingly low percentage of people who contribute to RRSPs annually proves that only a few are willing to actually make the financial commitment.

Politicians are often accused of failing to take the long view. In this case, the Ontario Liberals have chosen to bite the bullet. But for an already overtaxed population, it may be one step too far.

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About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

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