The Ontario Registered Pension Plan (ORPP) – It is still a go or is it?

Nov 12, 2015

Much has been written lately about the Ontario Retirement Pension Plan (ORPP), along with the potential expansion of the CPP. The recent induction of a new Liberal government, has brought this discussion back to the headlines.

The ORPP will be a new provincially managed pension plan created for all residents of Ontario. It will be mandatory for Ontario residents who don’t have a workplace pension plan, or don’t participate in a retirement savings plan that’s considered comparable to the ORPP by the Ontario government.

Similar in many ways to the Canada Pension Plan (CPP), it requires workers to contribute through payroll deduction with matching contributions from the employer. By the time it is fully implemented in 2020, the ORPP employee and employer contribution rate will be set at 1.9% of base pay up to $90,000 for total contributions of $3,286 per employee. The self-employed would not be required to participate since this requirement would conflict with the federal Income Tax Act, which prohibits the self-employed from establishing a registered pension plan.

Ultimately, over the course of a person’s working life, the ORPP is designed to provide approximately 15% of a worker’s pre-retirement income up to a maximum of $12,815 per year. An average contributor, earning $45,000 per year contributing for 40 years would receive an estimated payout of $6,410 per year.

Since it announced its intention to launch a ‘made in Ontario’ retirement pension plan during the last provincial election campaign, the Ontario government has been periodically amending that plan to slow implementation amid growing opposition within Ontario and a lack of cooperation from the Harper government. That may have changed with last month’s federal election.

A number of pension industry commentators, along with a new report from the Fraser Institute, have suggested the government should just forget the whole thing. However, with Prime Minister Justin Trudeau already meeting with Kathleen Wynne to discuss federal help with implementation and administration, we just don’t think the Wynne government will drop the ORPP scheme anytime soon.

While the new Liberal government could potentially introduce a broader national program with enhancements to CPP, it will require agreement from the other provinces and that will take time. Perhaps more time than Premier Wynne has, and if it takes Trudeau too long to implement an expansion of the CPP, the Ontario government is likely to proceed.

Like many business and industry commentators, we believe the approach taken by the Ontario government will significantly cannibalize existing capital accumulation plans that are already established by plan sponsors in Ontario. While we agree that some Canadians need to save more for retirement, we would prefer to see a more targeted plan to address where the savings gaps really are – single-person households and those with incomes in the upper ranges.

The ORPP, as designed, is unneeded for the 80% of workers who already have sufficient savings for an adequate retirement. Instead, the ORPP will negatively impact those very households it is intending to help, by adding new taxes during their early working years when additional taxation hurts the most.

As the Fraser Institute report points out, increased contributions to government mandated savings schemes would simply be offset by reductions in private savings plans. With each new percentage point the government mandates for forced contributions, the report finds there is a substitution effect resulting in a decrease in voluntary savings. We’ve seen that happen before, when the CPP contribution was increased to 4.9% from 2.8% in the 1990’s.

Finally, many in the retirement savings industry simply do not believe another mandatory government-run program is necessary. A more palatable solution in our opinion would be to amend taxation rules to encourage more private voluntary savings and give people more control over their financial planning.

Stay tuned for further updates as we continue to monitor this potential change in the Canadian retirement system.

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