With life expectancies rising and savings rates declining, governments are worrying about more and more seniors finding themselves without adequate income support.

The Ontario government’s answer is its proposals for an Ontario Retirement Pension Plan (ORPP), which aims to provide an additional 15% of pensionable earnings on top of the 25% already provided under the Canada Pension Plan (CPP).

The ORPP concept has received mixed responses; financial advisors and their industry associations are lukewarm about the idea. That’s partly because the details of how the plan will work aren’t fully known; partly because advisors aren’t sure it’s needed; and partly because of fears that the ORPP will be very costly to a government already running large deficits and carrying a big debt load.

Future may be different

Many people are keeping an open mind, but the list of potential negatives for the ORPP is daunting, particularly in light of studies suggesting that Canadians are saving enough already.

“The problem of poverty among the elderly, which drove many of the reforms in the 1970s and 1980s, has largely been eliminated,” according to an April 2014 study by Philip Cross, an Ottawa-based researcher with the Fraser Institute. Cross’s study cites another study that found only 4% of Canadian seniors (age 65 or older) lived in “absolute poverty” in 2009, and another study that found Canadian seniors have an average income that is 90% of that for the overall population in 2011.

But those figures are from the past. Many people think the future may be different.

“There are some retirement planning challenges for some Canadians, including some Ontarians,” says Greg Pollock, president of the Financial Advisors Association of Canada (a.k.a. Advocis) in Toronto. “We applaud that governments are looking for ways and means to provide assistance.”

A good answer

Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, part of the Rotman School of Management at the University of Toronto, agrees that a “considerable portion of Canadians won’t save enough for retirement.”

But is the ORPP a good solution? The ORPP proposes mandatory contributions of 1.9% of wages (up to $90,000) to the plan annually by both employees and employers in all companies that don’t have a “comparable” workplace retirement savings plan.

A major plus of the proposed ORPP is that it would be mandatory and, therefore, will force people to save for retirement – especially young people, who will benefit from years of compounded growth, says Alexandre Laurin, director of research at the C.D. Howe Institute in Toronto. Many people don’t start saving for retirement until they are in their 40s, focusing first on other obligations, such as paying down mortgages and saving for their children’s education.

Ambachtsheer, who is on the government’s technical committee advising on how the ORPP should be structured, thinks the plan could work if it is well planned.

However, Ian Russell, president of the Investment Industry Association of Canada, thinks the ORPP will be a costly initiative that won’t provide much benefit to retirees for many years. He also is concerned that the ORPP will impose a significant burden upon small businesses. Russell expects the costs of funding the ORPP to be in the multi-millions because the ORPP’s system will have to be built from scratch.

The ORPP benefit will be calculated on the basis of an individual’s contributions – like the CPP, on which the ORPP is modelled. For the CPP, an individual must have contributed for up to 40 years to get the full benefit, comprising 25% of pensionable earnings. Thus, it will be many years before the ORPP makes a significant contribution to retirement income for its contributors.

Unanswered questions

The mandatory contributions by employers effectively will be another tax on small businesses. Many people are worried about this additional cost, as most jobs are generated by the small-business sector. This is the main reason why Ottawa won’t consider enhancing CPP benefits, which the Ontario government had been pushing for.

Many unanswered questions remain. Pollock wants clarification about whether group RRSPs and pooled retirement pension plans (PRPPs) would be considered “comparable plans”: “The Ontario government has said it will introduce legislation for PRPPs this fall, which suggests that PRPPs will be ‘comparable.’ But what about group RRSPs, which many small businesses have?”

Pollock also is concerned about portability, noting that frequent job changes are common among people born between the early 1960s and the early 1980s.

“What happens when people change jobs,” he asks, “both within the province and out of the province?”

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