How Wynne’s ORPP will change savings habits

If Ontario implements its new provincial pension plan, many residents won’t have to save a cent for retirement

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From the February/March 2015 issue of the magazine.

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(Illustration by Sebastien Thibault)

(Illustration by Sebastien Thibault)

By 2017, all Ontario employees could have access to a secure defined benefit pension plan, thanks to new legislation being tabled by the provincial Liberals. The Ontario Registered Pension Plan (ORPP) is Premier Kathleen Wynne’s response to the federal Conservatives’ decision not to enhance CPP.

Some fear the plan’s mandatory contributions would handcuff investors’ autonomy, and leave already stretched workers and employers short on cash. However, it would achieve its ultimate goal: If the plan is implemented as proposed, many Ontarians will find that they don’t have to save for retirement on their own at all.

The ORPP will require all employees in the province not already enrolled in a comparable workplace plan to sock away 1.9% of earnings (on their first $90,000) in a professionally managed, low-cost fund. Employers will have to kick in 1.9% as well.

66%

Workers in Ontario not enrolled in a workplace pension plan

Source: Ontario Ministry of Finance

“I think a mandatory savings program makes sense,” says pension policy expert Bob Baldwin. But he’s less sure the province will be able to deliver on its promise of predictable benefits, indexed to inflation.

Under the plan, a worker making $70,000 would get a retirement income of $9,970 a year for life, and that’s on top of payments from the Canada Pension Plan (CPP) and Old Age Security (OAS). Combined, the ORPP, CPP and OAS could theoretically replace 55% of a middle-class retiree’s pre-retirement income. That’s enough to maintain almost the same standard of living they enjoyed while they were working, due to lower living costs in retirement.

The problem is, salaries could suffer as employers struggle to top up workers’ ORPP accounts. “Most employers can’t afford to pay the 1.9%,” says Baldwin. “That will lead to lower wages down the road.” As well, Ontarians will have less control over their retirement savings and how they are invested.

Baldwin, for one, says that could actually be a benefit though, as it will make workers less reliant on overpriced mutual funds and expensive advisers. “The return on investment will be better than with the typical RRSP,” he says, “due to the lower costs.”

More ORPP facts & figures »

 

 

26 comments on “How Wynne’s ORPP will change savings habits

  1. Good luck to living on C.P.P, OAS and ORPP in retirement. If you think that 20, 30, 40, 45 year old contributors are going to retire at 65, 67 than you are living in a dream world.

    The new normal for retirement 20 to 25 years from now is 72 to 75 years old. This is being cautious also. I can see a day when 77 years old is the new retirement age for qualifying for these so called, not so good pension plans that are inadequate to retire and will leave nothing to the next generation in assets, investments.

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  2. There a great deal of people that do not have the where withal to invest on their own and are dependant on the CPP OAS. Which is no adequate. If Mr. Harper had been more willing to improve the CPP it would have been better. Since that was not done we have to do something for the seniors in the future to have better security net. You try living on OAS &CPP. Most of the people have part time jobs and there are no benefits. I am sure they would love to be in the position to chose TFSA accouts and RRSPs. — but there not. What do we do-notheing is the other option. I am fortunate that I am not in that position- but when did we becomed such an uncaring society?

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    • @Mary Hawthorne – Do you think that somebody, who CANNOT afford to save right now, can afford to pay into the ORPP? And what about those who can save, but don’t? Why should I be punished for their lack of responsibility and sense of entitlement?

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  3. Ms. Stefania,
    You state : “Under the plan, a worker making $70,000 would get a retirement income of $9,970 a year for life”. What is the criteria for that? Is that the Maximum after contributing over a lifetime meeting the required minimum contributions like the CPP does? Or do older workers say 50ish simply get that amount if they contribute 1.9% for the next 10 to 15 years or so? What exactly are the rules around getting that amount? I think that is a key missing part of your article here. For those who have workplace pensions they contribute to, you need to juggle how much to invest and if you could even opt in to invest in both? I also ask, is it not somehow unfair that a person could contribute their whole life to a plan like this die at 64 and there is no benefit or possibility to leave 45 years of their contribution money to survivors of their choice?

    To me this whole thing makes no sense. taking more CPP contributions from everyone in Canada and upping their max payout from around $12,5K a year to $20K a year may be the better move if their is no other choice. Lets face it people are not saving enough, plus many are making poor investment choices or being lured by the many investment choices out there that may be less then ideal. Hopefully this Ontario program also will not put us on a “road to Detroit” having unfunded pensions but paying people from the magical debt money tree.

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  4. I wonder if they could allow workers to Voluntarily increase their own contribution higher for those who want an even larger pension at retirement

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    • @ JohnS – Exactly where I was going with my questions. Almost “annuitizes” :) a portion of your income. Without the high fee’s and fine print of one. Be nice to get an extra $830.00 / month insurance… X 2 if your married. Personally I am maxed out in my RRSP/TFSA. If I can add a little bit more to that (sheltered) at a reasonable cost then why not?

      And thank you for the link Stefania. It shows those numbers are based on 40 years of contributions 2%/2% employee/employer. Be nice to work that out vs. someone indexing with same amounts of money contributions for 40 years.

      @ Mary – there are no guarantees in life. People need to stop thinking they are entitled to a retirement and sacrifice things and plan better today to do so. The government does enough already (we take a lot for granted) and they already take too much in the way of taxes from us. I am living proof a successful future can be achieved, never being in the category of having a high family income. Have a look at how Singapore funds their citizens retirement sometime. A version of that with some tweaks would be ideal.

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  5. Yes but low income earners will be worse off in that they won’t qualify for the GIS to the same extent so they will be short take home pay up front and get the same amount of retirement income. Not to mention it will cost $100’s of millions to set up the infrastructure and that there would likely be a mass reduction in DC plan contributions or even termination of DC plans should they not be deemed to be comparable to ORPP. Bad idea at a bad time.

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    • Recipients would lose $0.50 of GIS for every $1 of additional income they receive. If I had to choose between receiving $1 of GIS, or $1.50 of ORPP+reduced GIS, I would definitely go for the latter. Who wouldn’t? And paying that 2% into the ORPP means they have to save less (if anything) for retirement, which they otherwise would have to do on their own.

      And the majority of Canadians (those who are saving for retirement anyway) are already paying BILLIONS of dollars in fees in high-priced mutual funds. Of course costs have to be kept under control with the ORPP, but you can’t count the cost of this program and ignore the hidden costs Canadians are paying right now by not having something like the ORPP.

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      • You can be sure that the liberal government of the day will only promote the reduced charges they’ve ‘miraculously negotiated’ for us without including their own overhead costs. What a windfall for whichever portfolio manager gets it.

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  6. This is a great idea if it means that people are contributing to their retirement and when time comes to retire there is money for them base on the they have amount contributed. So often we have heard that there willn’t be sufficient money into the CPP because more people are going into their own business and not enough contirbution is made to the plan. There are people who have worked for years and contribute to unemployment and never see a cent from their contribution. All these program and strategies are develop to benefit canadian, but we never see a cent from it. If I am contributing to my UI for when I am unemployed, today If you are unemployed one should be collecting their full pay. If I don’t meet the criteria i wouldn’t received any money . However, if I do collect it will be 55% of my gross income.
    This ORPP should be design to make sure Canadian retire in diginity and not poverty. Receiving company pension, old age security, CPP, RRIF, and money from one’s TSFA this can amount to a very good standard of living at retirement.

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  7. The result will be less money to spend today, but much more to spend in retirement. There is no free lunch. Workers will have 3.8% less to spend today (1.9% from their pay check, and 1.9% less wages as the employer will have to reduce wages in order to be able to fund the employer contribution). The big plus, however, is that workers will be less reliant on high fee mutual funds in their RRSPs (the financial services industry won’t like this) and will be less prone to beahvioural errors like buying high and selling low, so will have more retirement income. On balance, a good idea.

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  8. Isn’t this plan operated by those wonderful people who gave you E-health, ornge, gas plant closings, some people retired comfortable from this management

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  9. Seriously, after the Provincial Liberals gas scandal and other gross mishandling of public funds, they are the last government that I would rely upon to oversee the implementation of a reliable and dependable retirement pension plan. The best approach in preparing for retirement is to assume that only you are responsible for saving for your own retirement. Do not assume that you will receive any government retirement assistance; if you receive any assistance, consider it as a bonus!!!

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  10. Dear Stefania

    Your article “ How Wynne’s ORPP will change savings habits “ has not been very well researched. You only quoted comments from one person.

    You should try contacting the Canadian Federation of Independent Business. CFIB. I would very much like to see you publish their comments.

    I owned a small business in Ontario for 30 years. I had 45 employees at one time. I retired & folded up my business in 2014. The red tape in Ontario is killing small business. The proposed ORPP is bad for small business. Small business is the largest employer in Ontario.

    A 1.9% contribution comes right off the top of a business owner’s profit. This amount will vary depending on the profitability of the business. Where will the extra sales come from to cover this new business expense?

    Lets look at the history of the Province of Ontario’s handling of money.
    The Province of Ontario is running a debt of over $277 Billion.
    WSIB, which is run by the Province, is running a debt of over $10 Billion.
    Ontario Hydro is running a debt of over $19 Billion.
    What about the natural gas plant mess?
    Wait until we see what all the solar & wind power will cost us.
    There are many more. What makes them think this will be different?

    I wonder how many more jobs this will create on the sunshine list and what their pensions will be.

    If the Provincial Government truly wants to help people with their retirement, then they should educate our youth. There should be some kind of mandatory financial training done in our high schools. Teach them about RRSP, TFSA, Mortgages & payroll deductions, something they will use everyday of their life. The banks are handing out credit card applications to first year college & university students. Most of which do not understand how compound interest works.

    This is a very important issue. It deserves more attention than you have put in so far. I hope you will do a more in-depth article soon.

    I would also like to see Mr. Baldwin’s explanation of how he figures the Provincial Government could run a pension plan better than the private sector.

    If you are counting of the Ontario Provincial Government to fund your retirement, you better get to Wal-Mart early & steal your shopping cart, because you will be living on the street.

    Larry Clark.

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    • LarryClark – couldn’t have said it better!

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  11. If this plan becomes reality, it will be a really good incentive to leave Ontario.

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  12. I am disappointed in the lack of information the Ontario Government is providing about the ORPP. I would like some clarification on what the acceptable alternative pension plans will be. Will the ORPP eliminate a large percentage of current workplace DC pension plans? I would also like more information on any benefits that will be provided to surviving spouses or family members after death (at any age).

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  13. llovely someone is doing something! that willnot be enough to retire on AND it is matched contribution! too bad the feds don’t pull up their socks too! people have to sve themselves not just rely on the government, bROVA for Wynne!

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  14. Employers can reduce salaries by 4% to make up for this. A forced retirement plan. Not sure if it is good or bad but for someone that can barely make the debt payment they will be paying EI, CPP and the Pension an although they are saving lots for retirement they may find they cannot afford to buy food. That is around 2% + 2% for EI (estimate), almost 5% + 5% for CPP (no it is actually 4.95% not 5%), and 2% + 2%. Total take of their salary is close to 17% or 18%. Think I am full of baloney. Think again. I had the problem of barely getting by for many years and had a hard time getting enough cash to pay my back taxes and buy food. The conclusion I came to when I was dead broke is that all these government plans are make work projects paid for by me to employee people to take what would normally be my food money and to hassle me at the same time. I use to walk down Sparks Street in Ottawa and see people with tags on sitting around all day. I had to visit my parole officer (woops, tax collection officer) and he let me know in uncertain and not upfront terms that I was the worst Canadian ever because I owed them a few thousand dollars. Now being a few decades older I would cut the cheque and not even blink. The worst thing was when I was financing a consolidated loan in order to pay off the tax department (federal), I called the collection officer to find out how much I owe because I may be able to pay the debt, he went in to all these threats that I better make a payment in full or else which was months after we agreed to a payment plan. I remember going into Loblaws in Ottawa and wanted a .99 loaf of bread, I could only find 90 cents so had to settle for a bag of chips. I will never forgive and my conclusion on these government plans is leave it in the pockets of the person who earns it. They can choose to eat or fund retirement.

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  15. I think the pension plan is only put together so some more money managers can be hired and walk away with the cream. More then likely friends of the liberal family????

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    • Do Liars (I mean Liberals) operate any other way? Hiring insiders is their modus operandi. Look no further than the green energy scam that is taking place in Ontario. I will give you a hint. Take a perusal of the names they have already lined up to put a board in place for this pension scheme. They are all Liberal insiders.
      CD

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  16. Over-priced mutual funds? Expensive advisors? Not all advisors deliver little or nothing to their clients. I know I bring value to my clients and for that I earn every nickel I make. How dare he paint our industry with same brush! By the way, I wonder what Mr. Baldwin’s “expert” pension policy advice would cost? Maybe only he deserves to be paid for his advice. How does he know that the ORPP return on investment will be better than the typical RSP purely based on costs? What a stupid comment!

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  17. Ms Di Verdi, you have made one error in your article which is important to note. The ORPP is not a Defined Benefit Pension Plan, as proposed. At best it is a Target Benefit Pension Plan, and the proposal is clear that if there contribution rate is not sufficient, the benefits can be adjusted. The Ontario Government wants to portray its proposal in the best light possible, to appease people, especially organized labour, but if you look at the details, it is not exactly what you think at first sight.

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  18. The problem with all of this is that the ORPP is NOT a pension plan. The Wynne government plans to use the premiums from the pensions plan on infrastructure projects. The money is being spent, not saved or invested. The money to pay the pension benefits will have to come from yet higher taxes on the workforce at the time. Don’t buy into the scam that this government is trying to pull.

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  19. While it’s nice to know there will be money upon retirement, if most people can’t afford to invest in an rrsp as it is how does the government expect them to afford this extra deduction? It’s ridiculous and will just make us middle class families lose our homes to pay for retirement.

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