Is a government-forced pension plan a good one?

By Gord Hawley

The Ontario government under the leadership of Kathleen Wynne made good on its promise to create a new provincial pension plan for all Ontario residents who do not work for an employer who already has a structured pension plan for employees. The pension plan will be mandatory and is intended to affect all workers on the first $90,000 of annual income. Income above $90,000 is exempt.

Is it a good idea? Well, it was a key promise in the Liberal platform in last year’s election and the Liberals won. So we get what we mutually agreed to by casting or not casting our votes.

We have heard for years that people who are my children’s age — in their twenties — and younger will not have a Canada pension because it is going to be broke. Why? Because there are not enough people paying into it to support the ever increasing number of retirees.

When the CPP was introduced actuarial tables predicted that the average man would live to be 72 and the average woman to 76. Look around; how many people do you know who are over 65 and drawing pensions? Lots. How old are they? Some are now over 100 and our population continues to age faster than we are able to produce babies to work and pay for our retirement.

The CPP kicks in at age 65 but you can take a reduced amount and start receiving this benefit at age 60. Or wait until age 70 and draw more.

But typically, someone who retired at age 65 and is now 90 has collected for 25 years. Do the math and you discover these people have received more in CPP benefits than they paid into it.

Some will say that you get back more than you put in because of the investment growth in the plan. Yes, sometimes true, but what about the investment losses? At one time the CPP was not growing fast enough and the government at the time decided to take the money out of some CPP investments and put it into social housing to get a better rate of return. But that didn’t happen.

Canada Mortgage and Housing Corporation (CMHC) came up with a wonderful scheme called the “graduate mortgage” on low cost homes for young buyers. You could buy a 1,200 square foot condo townhouse for $31,750 with just $1,500 down and closing costs. Included in the sale were a new fridge and stove. A great deal, but it was structured so that the amount that should have been paid to buy it was turned into a deferred second mortgage that did not start to be paid back for 10 years.

I remember when I was vice-president of the Kingston Real Estate Association and I was at a real estate board meeting in Kingston with the regional head of CMHC when I suggested they call the “graduate mortgage” the “walk away mortgage.” He was not amused and asked why. Because the average buyer of a new home only stays three years.

In this scenario after three years the buyer would be under water regarding equity. So, what happened was most buyers didn’t sell their condos. They just gave their keys back to their lender.

To get back on track with their CPP investment, the federal government started Multiple Unit Residential Buildings as a new tax scheme to sell thousands of units across the country.

An investor was able to write off the depreciation on the buildings, not only on the rental property, but also the loss against other income.

Many high earners in well known professions took advantage of this new tax law and bought these properties for substantial discounts. I sold over 10 of these units for $25,000 each and where the government suffered a $15,000 loss per unit.

Let’s not do something like that again. This time the provincial retirement plan is intended to be managed by an outside investment firm and tie the rate of return to inflation with a reasonable expectation of determining the payout when you reach age 65.

This new pension plan becomes law in 2017. How much will it cost? Currently, it is proposed that the employee pays in 1.9 per cent and that is matched by the employer.

If you are self employed that would mean 3.8 per cent of your net earnings.

Is the mandatory pension plan a new blessing or curse? That depends on a lot of factors. How much will the investment firm be allowed to charge in management fees? How smart will the firm be with other people’s money? What safeguards are there if the investment firm doesn’t perform?

Gord Hawley is an Ottawa-based independent farm tax planner and can be reached at 613-716-2280 or at gordonedwardhawley@gmail.com.