OTTAWA: The threat that the roll-out of the Ontario Retirement Pension Plan (ORPP) in 2018 may further fragment Canada’s retirement system has moved Canada Pension Plan (CPP) expansion up the agenda for the June 20 federal-provincial finance ministers’ meeting. Yes, a bigger CPP looks better than the ORPP – but that is not saying much. Perhaps some higher-income Canadians could save more, but lack the foresight or discipline to do it. Even so, they – like so many lower-income earners the ORPP will hurt – might do poorly under an expanded CPP.
Why is that? Recall the standard pitch for an RRSP, or any other retirement saving plan where money going in is not taxed as income, and money coming out is. The idea is that the saver’s tax rate will be lower – or at least no higher – while retired than while working. In principle, RRSPs and pension plans ensure that retirement saving gets taxed only once, and since the tax bite on withdrawals is smaller – or at least not larger – than the tax relief on contributions, participants enjoy higher living standards over their lifetimes than they would outside these arrangements.
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In reality, though, means-tested benefits and other wrinkles make actual tax payable at various income levels quite different from what the standard pitch assumes. For one thing, the main income supports for seniors are clawed back: OAS starts disappearing when other income surpasses about $73,000 annually, and GIS and related programs shrink by 50 or even 75 cents per dollar of other income pretty much from scratch. For many people, the tax bite on withdrawals is larger than the tax relief on contributions.
Roll in provincial benefits seniors lose as their incomes rise and the tax bite in retirement is so large that most low-income earners are better off outside a tax-deferred plan – or indeed not saving at all. A critical flaw in the ORPP is that, like the CPP, its coverage starts at $3,500 of annual employment income. Most people earning so little will pay contributions they cannot easily forgo for the sake of benefits that taxes and clawbacks may reduce to zero.
A bigger CPP that charged higher contributions and promised higher benefits over the same income range it covers now would do similar damage. So many advocates favour extending the CPP’s income range above the current maximum of about $55,000 annually, perhaps to the $90,000 maximum the ORPP envisions. But here’s the second thing: As Jack Mintz commented last month, a flaw in the tax treatment of CPP contributions means the advantages of RRSPs and pension plans do not apply to higher earners.
