Ontario Retirement Pension Plan – ORPP

It’s not unusual for Ontarian’s to ignore and shrug off political agendas and proposed legislation. In fact, one could make the statement that far too often we react slowly to change, if at all. If there was ever a time to take notice and make your thoughts known it might be now.

Most are aware of new legislation passed provincially following federal legislation regarding pensions. What most Ontarian’s aren’t aware of is what the full impact to them individually might be.

The need for a pension supplement beyond CPP is not an urban myth. For years, most financial planners have been warning their clients to save more if they don’t want to have a dramatic lifestyle change when they retire. The question becomes whose responsibility is it and at what cost to all involved?

Let’s also take our hand off the alarm bell for a second. Many individuals are not in as bad a situation as they might poll to. As people near retirement they typically reduce debt, lower their spending, their obligations reduce as most children are out of the house and working. Many interviewed in their late 40’s early 50’s would feel overwhelmed but historically that’s when most start to make their larger retirement contributions and many make up a lot of ground once they’re through the “family years”. High income earners are already maxing out their retirement savings so this doesn’t apply to the top 15% of income earners.

Most Ontarian’s will not know the true cost of the ORPP for years. The lack of bipartisan cooperation between the federal Tories and provincial Liberals has created a potential huge liability for Ontario taxpayers. The Feds offered their PRPP solution, targeted at ensuring all business in each province at least provide a mechanism for stable return to all employees. The province wanted an expansion to CPP to cover off any shortfall. It has become a contest more about who will blink first then what is in Ontarian’s best interests.

Regrettably, the answer most likely lies in the middle. A mandatory offering with a low minimum employer match and locked-in status would have been an affordable solution at a time where the province is at a cross roads economically. A very slow graduated start period would have also been preferred although at least the province has softened this a little.

At a time when many are fleeing the defined benefit world due to the financial obligations involved, one of the most indebted governments in the free world has chosen to make a commitment it is going to struggle to keep. There will be a huge cost to build this infrastructure and without federal help collection will be another added management fee the program doesn’t need. In addition the province has no track record running a program like this and no guarantee they can outperform private plans at a time in history where finding a reasonable rate of return with low volatility is no walk in the park.

I would be fairly certain that the employee who loses their job due to the cost of this program would vote for a lower pension amount or more individual responsibility after the fact. In 10-15 years I also believe most Ontarian’s will then know the true cost to them and what the real rate of return was. With a total cost of 3.8% built as a payroll tax, many firms with fragile bottom lines will cut jobs. Employees will not want to bear their 1.9% portion forcing many employers into a heftier annual wage increase.

Already struggling to find economic growth, Ontario will be hit in two areas here. Their business will decrease spending in other areas to compensate. This will create incremental areas of additional lost revenue from lower employment numbers, less other payroll taxes and income tax, and less business infrastructure spending. At the same time as government revenues will decline from this, their internal expenses will increase. The cost to run this plan with or without federal cooperation will be massive and it won’t be a surprise that they underestimate that. In addition being a defined benefit approach they will be obligated to add additional funds if they do not manage the targeted positive rate of return to meet the defined benefit amounts due.

In addition, as a payroll tax, those with access to the corporate world will stop paying themselves salary to avoid the payroll tax. Instead they will work on after tax investments through taking corporate dividends, well within the rules and guidelines of the Income Tax Act. That will be yet another huge revenue hit for the province that no one seems to be talking about.

If nationally we are close to or in a smaller scale recession, then provincially this will at least add to that pressure.

Rather than becoming an opinionist with no answers let’s propose a few common sense alternatives for consideration. First of all, lower the minimum employee and employer contribution levels to start. Allow any defined contribution programs that meet the same required levels. Why are we penalizing firms that were ahead of this responsibility and have already implemented savings programs for their employees? In addition, why would a private DC be required to have more contribution than a provincially led pension (more than double)? There is no guarantee the ORPP will outperform an RRSP investment held by the individual through their group plan. There is no guarantee a government ran program will cost less to run and be more efficient and important to note, the private plans cost tax payers not a dime at this point.

I would propose a .5% match the first 5 years, then another .5% every 5 years until it’s a full 1.5% employee/1.5%employer. In 15 years the baby boom will be through as an obligation and most have funded their retirement year’s just fine without added help. At that juncture our demographics soften and we don’t have a financial burden until the echo generation closes in on retirement.

In the interim, and often a sore spot for me, let’s increase financial education to young people. It needs to be a larger part of the curriculum at the grade and high school level before our students start incurring huge student loans and requiring OSAP grants. More financially educated people will lessen the burden on government to manage their private personal affairs.

Further to this, our Federal government has to stop treating Ontario taxpayers, who provide it with its largest degree of funding, as second class citizens. Whether I agree with Ms. Wynne or not, if the province passes something it feels is in the interests of the province Mr. Harper needs to respect that and work with it not make it worse. You have to sometimes feel that politicians forget that their salaries, their budgets and their power are all obtained by us, the voter and the taxpayer.

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