Thursday, April 30, 2009

Retirement Pipe Dreams

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:

Children: 0-19
Workers: 20-64
Retirees: 65+

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.

In 2006, 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.


  1. Not sure I follow the logic ... isn't CARP saying that people should fund their own UPP through enforced savings, specifically that workers would not fund current retirees?

  2. "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."

    ...or they will live off their savings. Or they will be supported by family. Or some combination of the four.

  3. I really think that the CARP organization is completly daft.

    Their whole RIF campaign from last year was just stupid and now this?

  4. Canadian Investor: I doubt it because then their current membership would save little and get little. A UPP of this type you describe only works if you start to contribute when you're young.

    Patrick: Certainly some retirees will be able to live off savings and some will be supported by family, but these factors will not be enough to influence what happens to the majority. I think the majority will either work of be fairly poor.

    CC: Regardless of what CARP is proposing, governments do not let huge pots of money just sit around. At any future time, retirees will be supported by those who are working at that time. However, even if we suppose that the government will act differently, then CARP's number don't add up. The forced savings rate would have to be higher to save enough for the level of benefits proposed. Their numbers right now are tuned to give UPP benefits to current retirees paid for by current workers.

    Four Pillars: I can't decide if they are daft or if they are just asking for the moon in the hopes of getting more for retirees at the expense of young people.

    1. The third reply above was to a comment from Canadian Capitalist:

      Maybe I misunderstood what CARP is proposing but I thought they are *not* proposing a plan where current workers will pay for current retirees, future workers will pay when current workers are retired and so on. Instead, what they are proposing is a genuine pension plan (like the CPP), where payouts depends on actual contributions made and length of contributions. In other words, someone who contributed to the UPP for one year won't get the collect maximum benefits.