Ontario reveals plans for pension plan, says it can be integrated with CPP

The ORPP was billed Thursday as a mandatory plan that will be modelled on the CPP and could be absorbed into the national program.

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TORONTO – Ontario released a blueprint for a homegrown pension plan in its spring budget Thursday, but left the door open to expanding the program to other provinces and even suggested it could be integrated into the national Canada Pension Plan in the future.

The Ontario Retirement Pension Plan is Premier Kathleen Wynne’s response to the federal government’s refusal in December to expand the CPP at the request of several provinces.

While Wynne’s minority Liberal government said a CPP enhancement was still Ontario’s “preferred approach” to strengthening the retirement income system, the new provincial plan was touted as the next best thing as governments deal with aging populations and people who aren’t saving enough for the future.

“Since the federal government won’t lead, Ontario will lead by developing a ‘made-in-Ontario’ solution,” Finance Minister Charles Sousa said as he delivered the budget in the legislature.

“We have a duty and must do more to ensure that people have adequate savings in their retirement years.”

While some observers see the plan as yet another way in which the provinces are pressuring the federal government to expand CPP, Ontario’s opposition Progressive Conservatives have already condemned the program as a “job-killing payroll tax.”

Improving retirement income is, however, an idea that Ontario’s New Democrats have championed in the past.

The NDP has to decide whether it will prop up the minority Liberal government, but even if it doesn’t, the provincial pension plan is likely to become a key part of the Liberals’ election platform.

The ORPP was billed Thursday as a mandatory plan that will be modelled on the CPP and could be absorbed into the national program if the federal government agreed to a CPP enhancement in the future.

The CPP, established in 1965, currently provides retirement benefits to contributing workers up to a maximum of about $12,500 annually — an amount that critics have said isn’t enough for many in retirement.

Ontario’s plan, however, won’t apply to all the province’s workers — those with “comparable” workplace pension plans, federally regulated employees and those with income below a yet-to-be-determined threshold would be exempt.

The government said it is still consulting on how it can help self-employed individuals, who currently aren’t part of the plan, to better save for retirement.

The exemptions mean the plan will initially involve about three million Ontario workers when it launches in 2017.

The Canadian Labour Congress welcomed Ontario’s program and the fact that other provinces could potentially join it in the future.

“There’s a recognition by a lot of the provinces that a lot of people are going to retire with inadequate pensions and they’re going to have to do something about it,” said president Ken Georgetti, adding that workers his group spoke to supported a provincial pension plan.

“They know they have to save, they don’t know how to, and they know that deductions from your paycheck are largely the only way that this thing works.”

The Canadian Federation of Independent Businesses, however, said the ORPP would have a “disastrous effect” on small- to medium-sized businesses.

“We find that whenever there’s an increase in payroll taxes, there’s a decrease or reduction in jobs to be able to cope with the added cost,” said senior policy analyst Nicole Troster.

Rather than a provincial plan, the CFIB supported voluntary programs, like Pooled Registered Pension Plans, for enhancing retirement savings. Ontario plans to move ahead with a legislative framework for PRPPs in the fall of this year.

The ORPP would require equal contributions not exceeding 1.9 per cent each to be shared between employers and employees, on annual earnings up to a maximum of $90,000.

Enrolment in the plan would take place in stages, beginning with the largest employers, while contribution rates would be phased in over two years.

The plan would be publicly administered at arm’s length from the government and be responsible for managing investments associated with annual contributions of about $3.5 billion.

While currently an Ontario-specific plan, the ORPP could be expanded “to enhance the retirement income security of those living outside Ontario,” the government said.

That option meant Ontario was setting a precedent in a way, said Susan Eng, a spokeswoman for CARP, a national seniors advocacy group.

“If Ontario shows them a way that would work, then it’s nothing for them to go ahead and parallel it,” Eng said. “And if all the provinces pass parallel legislation with reciprocal provisions then we have in effect what we would have had if (the federal government) had increased the CPP.”

A number of provinces, including Nova Scotia, Prince Edward Island and Manitoba, indicated they’re certainly watching Ontario.

Having other provinces consider their own plans, or contemplate joining Ontario’s could push the federal government to reconsider enhancing CPP, said one observer.

“Ottawa isn’t really keen, I think, on having the provinces all start up their own pension plans because it starts to break up the federation a bit, it starts to create barriers to people going from one province to another looking for employment,” said Thomas Klassen, a York University political science professor who studies pensions.

Klassen noted, however, that the lack of political consensus on the pension plan in Ontario, weakened its case with Ottawa.

“I think that problem is going to be taken care of when there’s a provincial election and the people are going to have the ultimate say about this.”

4 comments on “Ontario reveals plans for pension plan, says it can be integrated with CPP

  1. A $50,000 Ontario income earner would pay $950 a year and his or her employer would also pay $950 per year. This is a combined $1,900 per year. If this Ontario income earner would put this $1,900 into an RRSP, he or she would $600 a year in annual RRSP income tax refunds.

    This is a combined $2,500 a year in total RRSP contributions per year. Assuming that a 2.75% annual increase in these premiums were done over 45 years and the ORPP paid at 71 years old so basically a 26 year old retires at 71 years old then he or she would have $509,874.

    This is based on a 4.00% annual interest rate compounded annually. The interest alone would be 4.00% annually, $20,394.96 at retirement age of 71 years old and he or she would still have $509,874 of capital or principal,

    The ORPP is replacing 15% of the Ontario income earner so a $50,000 Ontario income earner would receive only $7,500. Even if we assume a 2.75% annual inflation indexation for 45 years, this is better at $25,424 in annual ORPP benefits but there is no $509,874 for the Ontario income earner in his or her RRSP.

    The ORPP is giving you 25% above the annual interest paid. If you take $25,424 annually indexed at 2.75%, it would take 23 years and 6 months to finish or deplete all your $509,874.

    You would have to live to 94.5 years old to just break even and have the same financial benefit. I don’t know the exact statistics but most people do not live to 94.5 years old.

    It maybe 25%, 30% or 35% but not 100% of the Ontario population. I can see now why the Ontario government wants an ORPP. It is better for the Ontario Ministry of Finance and for it’s coffers.

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  2. Even a modest average increase in interest rates from 4.00% to 4.46% which is a 11.50% increase over 45 years would match the ORPP annual benefits of $25,424.

    The annual interest paid would be $25,437 and he or she would have a larger RRSP balance of $570,345. True, there is no 2.75%, annual inflation indexation but having $570,345 is still better for the Ontario income earner in his or her RRSP.

    Just to give a simple calculation, including no interest for 23.5 years until age 94.5, the annual withdrawals to finish or deplete the $570,345 would be $24,270.

    If you include interest over 23.5 years, the annual payments would be $38,400 at age 71 years old which is already 51% higher than an ORPP benefit person would receive.

    Imagine if we see normal interest rates, GIC’s and government bond yields in the 5.00% to 6.50% range like we did in the late 1997 to 2007.

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  3. I meant to say he or she would receive $600 a year in annual RRSP income tax refunds. Sorry for the mistake.

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  4. Our family is aggressively saving using time and compound interest to our advantage. We mostly have strip bonds both Canadian, provincials. We are taking advantage of 4.00% to 4.10% 18-22 year maturity dated investments.

    We are maxing out all our RRSP’s since 2003 and TFSA’s since 2009. We buy 1-2 year GIC’s in our non-registered accounts for our financial cushion of $12,000 annually started in 2013.

    We are putting presently $24,000 annually into our RRSP’s and $11,000 in our TFSA’s plus $10,000 provincial strips in non-registered accounts. Our goal is to have $5,000,000 by the time we are 65 to 67 years old.

    We are currently 32 and 33 years old and have a gross annual income of $134,000 a year. We currently have $255,000 in RRSP’s, $69,000 in TFSA’s and $28,000 in 1-2 year GIC’s, cashable GIC’s.

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