Wynne's Pension a Bad Deal for Young Workers

Ontario Premier Kathleen Wynne believes that the Canada Pension Plan (CPP) is failing Canadians. She is not entirely wrong.

The CPP does fail Canadians, but for completely different reasons than the Premier contests. Whereas Premier Wynne thinks CPP doesn’t take enough off your paycheque, the real problem is that its funding model resembles a Ponzi scheme. Young workers stand to lose a significant amount of money through the CPP; it leaves them with little choice over how to invest and enjoy their retirement savings. That is why Premier Wynne’s plan to create her own Ponzi scheme to make up for the shortcomings of the federal Ponzi scheme fails on so many levels. Wynne’s new pension scheme, called the Ontario Registered Pension Plan (ORPP), will force Ontario workers to contribute 1.9 per cent of their income into a pooled-retirement fund managed by the provincial government. Employers will also have to find an additional 1.9 per cent to match those contributions. Essentially, the plan is to duplicate the CPP in Ontario, and force Ontario workers to contribute to both funds. This is a bad solution, but the Premier has at least opened the door for a robust debate on the topic of retirement savings and government-managed pensions. There are better solutions to this problem than simply copying and pasting the CPP into Ontario.

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The CPP’s flaws began to show in the 1990s when it was acknowledged the fund was running out of money. The pay-as-you-go funding model meant that young workers were contributing each year to pay for the benefits of retired Canadians. But as more people retired and began living longer, there simply wasn’t enough money to meet all the payment obligations. According to a 1993 actuary report, detailing the math and funding projections for the CPP, it was predicted the fund would go bankrupt by 2015. Big changes were needed, and the governing federal Liberals decided to hike CPP taxes to make up for the funding gap. In 1994, the typical Canadian paid $806 to the CPP. In 2004, that number had jumped to $1,832. And now, in 2014, we each pay $2,464, which is matched by our employer. We pay three times as much to the CPP as we did two decades ago. But these increased contributions have not lead to more benefits for retirees. The opposite is true. Young workers can personally expect to lose hundreds of thousands of dollars to the CPP. Based on the current funding model, all Canadian workers born after 1985 will only receive 66 cents on every dollar that they would be owed from their CPP investment. This is because the CPP produces good returns, but for young workers almost a third of the value of their contribution goes to pay existing retirees rather than their own pension. Can you imagine a bank doing that? Telling you that a third of the interest from your savings account will go to pay another customer's credit card bills? What a raw deal. We are “investing” our money into a sinking ship. Premier Wynne may have gotten the ball rolling on the discussion of pension reform, but her solution is just more of the same. She is forcing young Ontario workers to double down on a very bad bet. By duplicating the CPP’s pooled-saving model, and not allowing Ontario workers to control their own savings, Wynne’s ORPP will simply be another government Ponzi scheme that is incredibly unfair to young workers.