Canadian Financial DIY had a thoughtful piece about pension reform and what retirees need that will resonate with many Canadians. An important consideration for any such plan is whether it is economically viable.
The plan calls for replacing 40-45% of pre-retirement income adjusted for inflation for the rest of the retiree’s life. This is a significant increase over the existing Canada Pension Plan benefits. Let's assume that this change in benefits will be achieved by expanding CPP and that it will be fully funded by sufficiently large deductions from everyone's pay cheques to pay for these retirement benefits.
I'm assuming that the 40-45% replacement figure is intended to apply to your income in the last few years of working, which is generally more than the average income over your working life (even adjusted for inflation). So, let's say that your yearly retirement benefits will be 50% of your average lifetime inflation-adjusted income.
Let's also assume that the average Canadian works for 40 years and is retired for 20 years. Then you need to save enough in two years of working to pay for one year of retirement income. This means that CPP contributions will need to be half of the retirement benefit, or 25% of income. Income taxes complicate this calculation. In reality, CPP contributions may only need to be about 20% of your gross income.
Currently, the total of the CPP contributions you and your employer make are only just under 10% of your gross income, and this is only for income below the current cap. This cap would have to rise to give any real meaning to the 50% replacement figure, and now we're talking about doubling CPP contributions for low-income Canadians and more than doubling them for middle- and higher-income Canadians.
All this may well be sensible, but it won't be cheap. The more modest CPP changes that Canadian Capitalist reported on are much more likely to be adopted.
Another thing to consider in this discussion is that if we adopt a system with higher CPP contributions and benefits, the higher benefits would only apply to people who pay the higher CPP contributions for their entire working lives. If these plans were adopted today, current retirees would get nothing extra and those close to retirement would get little extra.
Any plan that gives current retirees and those near retirement significantly higher benefits must necessarily be paid for by others. Those others are young people. I wonder how much we can tax these young people to pay for lavish retirement benefits before they revolt.