Pension Pick-Pockets

What do you call a Pension contribution that you cannot collect? Theft. It’s called theft.

The Canadian Pension Plan (and it’s cousin, Le Régime de Rentes du Québec) is a mandatory insurance plan – implemented in 1965 across Canada, with the purpose of securing old-age income for senior Canadians. It is illegal to not contribute a share of your income to this investment fund. Even if you are self-employed, you must still send a share (in fact, a larger share) of your earnings to Ottawa for safe keeping until you retire. Functioning essentially as another income tax with an added senior benefit, I’d argue the CPP is in practise the most regressive tax in Canada.

At its best, the CPP operates like a retirement-nanny who forces people to save who otherwise might not. In the most positive light, we could argue that this level of foresight is hard to come by, and therefore a kind of public good that is rightfully enforced by the law. In the less optimistic range, we might say some elements and particulars of the CPP should be reformed to better reflect today’s work, gender and income realities. But at its worst, there is a simple case to make that for the most vulnerable Canadians, the CPP is legislated theft. When closely examined, the CPP is currently designed in a way that most adversely impacts low-income and low-life-expectancy Canadians. There is a clear demographic of people who will be the hardest hit by this mandatory savings tax, and then never get their money back.

Tickets or Taxes?

Like private pensions, the CPP has an annual maximum contribution. Unlike private pensions, though, you can only opt out of contributions by breaking the law or quitting your job. The Yearly Maximum Pensionable Earnings (YMPE) in 2019 is roughly $57k (and changes with inflation); everyone thus pays 5% of their first $57,000 of their income into the national pension. Employers also contribute an additional 5%. Self-employed Canadians pay the full 10%.  Seems egalitarian, but wait, this effectively means that the poor will pay a greater share of their income than the rich.  Whether or not you consider this as a fair arrangement, this is the textbook definition of a regressive tax.

This same number – 57k – is also equal to the income level of the bottom two quintiles, or the poorest two-fifths – of Canadians. The people in these brackets pay effectively the biggest share of their income into the pension. Those making $100,000 for instance, effectively put 2.25% of that total into the CPP, where as anyone below $57,000 pays 5%. Again the math is fairly simple: more you make above the YMPE, the less total share of your income goes into the fund.

You might argue at this point, that contributions to the CPP are a bit like admissions tickets. Everyone pays the same price as they work, and everyone reaps the same level of rewards – safe supplemental income for their golden years. Sure, and on the same front, we could also say that the poorest people will receive a greater benefit, because the maximum benefit of $1,134 per month (2019) means way more to them than it does to the rich. A drop of water can make more noise in an empty bucket.

Except that this is not entirely the case. Your annual CPP contributions are obviously on record, and your subsequent retirement benefits will get adjusted accordingly.  Those who muddled along with low income under the YMPE – say $30k per year – will definitely not get the full benefit in their golden years.

You pay for a cheaper ticket, you get a cheaper senior benefit. But wait – here’s where the metaphor falls away: the entire ticket idea implies that this is a voluntary exchange, which the CPP is absolutely not. The very basis of the contribution is like tax – the government is taking the same percentage cut of what money we make – up to an income ceiling. So despite the fact that each of us is required to give the same proportion of our YMPE, the ‘equal burden’ of a 5% tax will still not give you an equal benefit if you happen to be a poorer contributor.

A Regressive Burden

So effectively, we can now say that the CPP instead operates instead even more regressively than previously thought – as a flat rate tax hitting the poor harder than the rich, that also better benefits its richer contributors – at the upper end of the YMPE and above.

We should also add the fact that the ’employer’ burden of paying CPP contributions negatively effects the poor more then the rich. Negative impacts include the prospect of unreported ‘silent’ consequences, such as the decision not to hire more people because of the marginal cost; there are also explicit consequences, like the greater impact to your low-income employees than high income. Effectively, the 5% employer contribution places a tax on employing people, but especially people who do not make that much. As stated above – as a portion of the total income, and in addition to EI contributions of 2.5%, it means you will pay a 7.5% tax on the income you provide to your employees making 55k or less:

Income_brackets_1bcd

 

But above that level of income, no additional costs! Just like the YMPE for pensions, there is a maximum insurable amount for EI. If these mandatory schemes were mapped out like income tax brackets, it would be plain that they are textbook regressive, enough to make the lowest bracket actually a higher net total than the second: income earners at 45k and below are burdened at 22.5%, versus 55k and up at 20.5%.

Fairness is Relative

A common argument made about this regime is that it’s fair to charge Canadians these basic fees for basic social safety nets. We all chip in, millionaires and janitors alike. But as we discussed above, this ticket price will hit some people harder than others, precisely because the burden is capped in the first echelon of your income.

How about another form of fairness? We all pay 2% of our income into the CPP, with no income cap. Janitors and millionaires would be contributing an equal percentage share of their income all the way up, and the burden on income brackets would level out. But wait – suddenly the millionaires would complain that this is unfair to them. Why should they pay $20,000 while a janitor making a paltry 30k pays $600?

The relative fairness of one burden versus another can always be called into question, without a clear answer. In fact, the answer to this dilemma generally relies on your basic assumptions, and might just come down to your political ideology. If you think that such a thing as regressive taxation exists, and is a wrong, than you’d likely side with janitors over millionaires. But if this scheme is tantamount to income redistribution, which unfairly punishes successful people, then maybe the CPP is good as is.

If there’s one caveat I might add about siding with the millionaires, it’s that their relative share of all Canadian income is in fact, so immense, that an equivalent ‘flat CPP tax’ would not need even to be as high as 2%.

Income Shares Canada
The top quintile with 50% share of total disposable income. Source: Statistics Canada

With a total aggregate income in 2017 of roughly 1.3 Trillion dollars, and expected CPP contributions at 45 Billion, the net result of a 3.5% contribution rate (which could be split employer/employee to 1.75%) would cover the same amount of contributions as the current 9.9% rate that only applies to the YMPE cap of 57k.

Mandatory Pensions & Moral Wrongs

By contrast to the CPP, the Old Age Security (OAS) benefit is given equally to all Canadians. It draws money on our other shared tax burdens (the pool of GST, Income Tax and other Revenue) to provide a steady basic income for those 65 and older.  In fact, the OAS itself operates progressively by clawing back its benefits from those who already have a very high senior-age income. If you do not need it, the OAS will not apply to you; conversely there is no quibbling over receiving the full benefit on the OAS if you have a lower income and thus lower contributions.  In 2011, totalling the spending of the federal government and sales puts individual transfers (such as OAS and GIS) at 13 cents for every dollar of federal spending. So, despite the plausible CPP argument that old-age recipients should ‘pay their way,’ Canada contributes significantly to safety nets that have no contribution scheme at all.

There seems to be far greater moral wrongdoing in making the CPP a mandatory program, than reinforcing a simple safety-net like the OAS. The creation of the CPP in 1966 was a response to the demand at the time for an employment-based retirement benefit that would ‘follow you from job to job.’ Yet the leap from ‘popular demand’ to ‘universally mandatory’ seems to miss the harms it can impose in the space between. Also, it is not as though Canada was lacking in pension options.

There is no shortage of private pensions in Canada. Those citizens that can, will easily begin to secure their own future. The effectiveness of the private pension market might explain why so many senior Canadians today are even forgetting to apply to receive their government CPP benefits – pushing the 2019 government to begin ‘proactively enrolling’ seniors to receive their money back.

The 1966 push for the CPP was later followed up by reinforcing the OAS in 1967 with the Guaranteed Income Supplement (GIS). This supplement was also progressively designed – it will pay out more to seniors that have less money. When the peril was obvious for Canadians that in 1966 were too old to pay into (and benefit from) a just-created pension system, the Pearson government supplied them with a GIS to make up the difference. So again, the basic social impetus to simply provide for seniors is well within Canada’s capacity.

Insufficient Measures

There are some measures the government of Canada takes to mitigate the CPP burden. The Minimum Income Exemption exists, where earnings under a specific flat amount ($3500) are exempted from CPP contributions. The thing is, this amount used to be increased nearly every year, but was frozen back in 1996 under Chrétien. It has not been changed since. Were $3500 in 1996 matched to today’s inflation index, the exemption would be $5250 in 2019.

The Canada Workers Benefit offers some respite for anyone making below 30k – with variations based on family status and province. Canadians can get back between 1k-2k through claiming this benefit. However, this exists independent of the CPP, and was introduced in 2007 to change incentives for accepting low-paying work.

On the contrary, it seems that the plan for the future is actually to take more money for your CPP. Justin Trudeau’s most recent budget introduced CPP ‘enhancements’ and beginning in 2019, there will be an increase in your mandatory contributions. Going up by increments each year, so that by 2024 employees and employers will each pay 6% of valid earnings under the YMPE. In a bit of needless complexity, there will be a new additional ‘second ceiling’ on contributions. The effect of this Pension Attic is that income above the YMPE, but below a new threshold of around 70k, will be taxed for the CPP at a reduced rate of 4% from employee and employer each.

Why not secure the benefit of the CPP by other means, and remove the disproportionate burden it places on lower income Canadians. You could give alternate enhancements to the OAS, and then diminish contributions to the CPP – take care of the elderly, but leave people their own money, let them make their own decisions for saving, and let employees and employers keep their resources? The CPP no doubt benefits the elderly, but we forget that it also burdens students, self-employed workers, and especially families. The CPP takes money from parents who could have spent that income on some really important investments – like namely, their kids.

Till Death do We Devalue

In this sense, we could paint the CPP as a mandatory gamble on your income, based on the premise that taking your money now, and giving it back to you later, will always to be to your benefit. This is the retirement nanny forcing you to save. But I can guarantee that will not always be a benefit to all, with 100% certainty.  I can guarantee that there will inevitable be a share of people who will die before they collect their CPP, and most likely, it will be those who make 50k or less.

It should not be a shock to know that there is a huge correlation between low income and low life expectancy. There is much Canadian data on this relationship, but the best image I found to illustrate this fact was from an American study – an income survival curve:

US_survive_income_BIG
In the US, 20% of the lowest income bracket is dead by age 63.

The visual data confirms what essential the most basic assumptions would conclude – lower income is a strong factor in a shorter lifespan. This data set is for the United States. Though I could not find a satisfying graph for the same figures in Canada, the government statistics still back up the same idea, for instance, in 2017 20% of total deaths occurred for individuals aged between 20 and 64. A similar Canadian study, checking in with subjects between 1991 and 2006, detailed the causes of death as related to lower income.

Well, the CPP has a plan for your death. The death benefit pays out to a spouse or dependent, based on your contributions, and expected retirement benefits, up to a cap. Wait – actually, that would probably be too reasonable for the current CPP – if you check the link, the death benefit in fact pays you a one-shot lump of of $2500. With the same repulsive sleaziness as the Minimum Income Exemption, the CPP death benefit was also frozen in 1998, and thanks to inflation it becomes more and more paltry with every year.

So again, back within this lower income bracket, a large swath of nearly 10-20% of the lowest income contributors are also those especially likely to contribute more than their spouse can ever possibly receive. Working at a 30k income for forty years would net a citizen around $60,000 in contributions – if they expect to pass away (a 1 in 5 chance) in early retirement, then their widow collects a pittance – less than 10% of their donations to the CPP.

By setting the YMPE on the first chunk of money you make, you essentially place an extra tax on those most likely to pass away before they can claim its benefits. The CPP tax burden falls hardest on those who earn the least and are the least healthy.

Shift the Burden?

No doubt the best intentions and reasons were behind implementing a saving scheme for the most vulnerable in our country. Historically there was a genuine need to implement some form of old age security in Canada starting in the 1920s, through the great depression into its origins in the 1960s. From government-sponsored annuities, to the OAS, the GIS, to the CPP – there is no doubt that Canadians and their politicians responded to the needs of senior citizens with little means of subsistence.

It’s just a shame that in the implementation of the national pension, they forgot the reality of lower income and lower life expectancies. The YMPE, combined with frozen death benefits and exemptions in the 1990s, make the CPP an explicitly regressive burden that is likely to be hurting the working poor in the name of helping the old and aging.

 

 

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