Notes on Proposed Ontario Retirement Pension Plan

by Kevin Milligan

Here are some notes from my presentation at the Financial Markets Regulation Roundtable sponsored by the School of Public Policy at the University of Calgary. The Roundtable was held on June 25th in Toronto.

PDF of the presentation is here.

The presentation is based on my joint work with Tammy Schirle of Wilfrid Laurier University which can be found here.

More information on the ORPP can be found here.

 

Agenda

Three points to make today:

  1. Is there a need for more earnings replacement?
  1. Extra coverage to low earners is major design flaw
  1. Regulation issues for the ‘O-PPIB’

 

Is there a need for ORPP?

Many middle and high earners have less than adequate income replacement rates—especially those without employment-based pension.

Is that a problem for government to solve?

  • For high earners who don’t save, do we need government to ensure they can holiday in Florence instead of ‘just’ Florida?

Opinions differ, but here’s mine:

  • Government can provide an inflation-indexed, jointly annuitized, guaranteed benefit at a good price.
  • You can’t buy that on the market—it is good insurance.
  • Some expansion can be justified to firm up the base of retirement income

 

Major Design Flaw: Low-Earner Coverage

  • OAS and GIS mean that 95% in lowest earning quintile have >70% replacement rate.  2/3rds have >100%!
  • ORPP makes these low-earners transfer more resources from now to the future.

o   They are struggling now; they are struggling less in the future.

o  This is a bad trade.

  • Worse, their contributions are for a full entitlement but they only get half.

o  Why? GIS claws back half their benefit.

o  So, they are paying double for a pension they don’t need.

  • Fixes? Exempt low earners. Maybe up to 25K?

 

Regulation of “O-PPIB” 

  • Proposal allows opting out for those with “comparable workplace pension”.

o  So, we won’t be shifting money out of Teachers or OMERS and into ‘Ontario-PPIB’.

o  Imagine hugeness of CPPIB under a CPP reform that didn’t carve out existing RPPs.

 

  • Investment policy: CPPIB has done well here; can ORPP match?

o  Provincial agreement required for amendments to CPP—hard to put hand in cookie jar.

o  The platform says both “the ORPP will be publicly administered at arm’s length from government” and that “the ORPP will be able to invest the premiums it collects in Ontario businesses and infrastructure.” Which is true?