The Canadian Association for the 50-Plus (CARP) is lobbying government to expand the Canada Pension Plan to a new Universal Pension Plan (UPP). CARP’s vision for this UPP is so ridiculous that they should not be permitted to participate in any serious discussion of pension reform.
The proposed UPP would pay retired workers 70% of their pre-retirement income up to the salary limit for registered pension plans ($116,667 for 2009). This sounds wonderful. Because people tend to have higher incomes late in their careers, the 70% level would give retirees roughly the same income as working people, on average. This means that the average retiree would get to enjoy a middle class lifestyle without having to work or live off savings. But, how can we pay for this?
CARP suggests adding additional payroll taxes of 9.9% of your first $46,300 and 15.4% of the rest up to $116,667! This is an enormous tax increase, but maybe not impossible. However, this is based on the current Canadian demographics. What will happen as our population ages?
Statistics Canada produces tables of past and projected numbers of people in each 5-year age group. I’ll use the following three names for different age ranges:
We may debate whether 18 and 19-year olds are children, but given that people tend to enter the full-time work force somewhere from 16 to 24, age 20 is a useful cut off between those who are supported and those who work full time.
From the 2006 demographic table, we find that for every 100 workers, there are 21 retirees and 38 children. However, by 2031, this will rise to 41 retirees and 35 children.
For retirees to live a middle class life matching that of the workers, workers would have to pay about 29% of their incomes in payments to retirees. We get this figure by dividing the number of retirees (41) by the total number of workers plus retirees (141).
The tax burden on workers would then be 29% for retirees plus whatever it takes to build schools and roads and pay for all the rest of government. This is about 20% higher than it is now. A Canadian worker might now get to keep 60% of his income, but his counterpart in 2031 would only get to keep 40%.
It is absurd to think that workers would tolerate this situation. Tax rates would be so high that there would be almost no incentive to work. Our economic system would collapse.
The inescapable conclusion is that either the majority of people over 65 will work or the majority of them will live well below the middle class standard. This isn’t a wish. It is reality. I would love to be able to count on huge government payments when I turn 65, but it can’t happen.
CARP is doing its members a disservice by leading them to believe that the UPP is anything more than a pipe dream.