By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
After years of debate, the Trudeau Liberals have rekindled the push to expand the Canada Pension Plan (CPP), with the federal government committed to achieving an agreement with the provinces. Finance Minister Bill Morneau will soon meet with his provincial counterparts to discuss options on how to raise mandatory contributions on working Canadians to provide increased benefits in retirement.
Unfortunately, the ongoing debate about expanding the CPP has been a distraction from where the real problem lies in Canada’s retirement income system. Concerns about the adequacy of retirement income are mostly driven by a misplaced focus on middle- (and sometimes upper-) income Canadians not saving enough for retirement. That focus is misplaced because the evidence shows most Canadians are well prepared for retirement.
But there’s a small pocket of largely overlooked seniors who, because of their low income, are financially vulnerable in retirement. Unfortunately, expanding the CPP won’t help them.
To begin, it’s important to understand which seniors are most vulnerable. Statistics Canada’s “low income cut-off” is not an official measure of poverty but does indicate whether someone is likely to experience difficult financial circumstances. Thankfully, the share of seniors living in low income based on this measure has fallen dramatically over the past four decades: from 29 per cent in 1976 to 3.7 per cent in 2013.
This stark decline shows that Canada’s retirement income system has largely been successful in helping the overwhelming majority of seniors avoid living in low income during retirement.
Despite this positive development in recent decades, some seniors remain at higher risk. Specifically, single seniors living alone (widows or divorcees, for example) are much more likely to be in low income than other seniors.
In 2013, 10.5 per cent of single seniors living alone were in low income (most of them were women). The rate of low income among single seniors is considerably higher than both the rate for all seniors (3.7 per cent) and the rate among married seniors living independently from other family members.
A subset of single seniors is at even higher risk of being in low income, namely single seniors living alone without any income from the CPP. Almost half of these single seniors (48.9 per cent) are in low income.
Although the CPP is not designed to be an anti-poverty tool, there’s a perception that expanding the CPP would help financially vulnerable seniors. Unfortunately, it will not, partly because many low-income single seniors have not worked outside the home in their working lives and thus have not earned any labour income – a key determinant of CPP retirement benefits. Those with no work history, and thus no contributions to the CPP, will receive no additional retirement benefits from an expanded CPP.
Even for low-income single seniors with work histories and sufficient contributions to the CPP, expanding the CPP may provide little or no assistance. That’s because a higher CPP benefit could simply result in a reduction in federal (and provincial) government benefits targeted at low-income seniors, such as the Guaranteed Income Supplement. This means the total net increase in income would be less than what is implied by the increased amount of CPP income.
In short, expanding the CPP will largely fail to help Canadian retirees most in need of assistance.
Instead of expending political energy on debating CPP expansion in the misguided belief that many middle- and upper-income Canadians are not saving enough for retirement, the focus of public debate should be on how best to help financially vulnerable seniors.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is policy analyst at the Fraser Institute.