Hey, I’ve been hearing a lot about this new ORPP that the Ontario Liberals want to bring in. What is it?
It’s supposed to be the Ontario version of the CPP – the Ontario government will deduct a certain amount from your paycheque each week, and your employer will match that amount. Do that for x number of years and you are eligible to receive an Ontario pension cheque in your glorious retirement to add to the Canadian pension cheque you get.
OK, but do we need another pension? Sounds redundant.
According to Wynne you do. Household savings rates have slipped from a high of about 20% in the late 70’s to less than 5% of household income. So her thoughts are we aren’t doing enough saving to provide for ourselves in our old age and the CPP doesn’t cover it, so they’re going to come and “help” us save more money.
That’s right, didn’t she say she’s only introducing this because Harper wouldn’t improve the CPP? But wait a second… isn’t her buddy Justin Trudeau in power now, and didn’t he say that he would improve the CPP?
Yes, but it was never about Harper or the CPP. Harper did plenty for assisting people with saving for their retirement by creating TFSAs and other vehicles, and still the rate of household savings fell – there’s over $100 billion in unused capacity in RRSPs and TFSA’s in Canada. Harper took the view that government should provide vehicles for savings, but that how much you saved was ultimately your responsibility. And by and large people didn’t take that responsibility.
So now Wynne wants to force us to save money?
Exactly right. It’s actually referred to as “forced retirement savings plan”. You have no choice in the matter. Which is a typical liberal approach; they’re looking out for us, they have our best interests at heart, so do as we say. Nanny statism at it’s finest.
So everyone is being told they have to contribute to the ORPP?
Not everyone – approximately 35% of Ontarian’s already have a pension plan. Wynne says those people will be exempt… well, some of them.
Not all pension plans are the same. In simplistic terms there are Defined Benefit plans, where the contribution amount may fluctuate but you know exactly how much you are going to pull out in retirement, and Defined Contribution plans where how much you contribute is defined, but how much you pull out is going to vary depending on how your investments have done. The ORPP is a DB plan, and so Wynne wants the ability to review existing DC plans – and if they aren’t up to her standards you’ll be forced to contribute to the ORPP.
So what’s the chance my DC plan will be exempted?
Pretty low, my friend. Unless your contributions are 8% of income, which is a pretty high bar that has been set by the Liberals.
Alright, but defined benefits sounds great, there’s no guess work, no worrying about the how well my investments might be doing… So how much would I get out of the plan?
Well, if your income is around $90k/year and you start contributing to the plan in 2020 when it’s in full gear, after 40 years of contributions you will be eligible for approximately $12,800 per year upon retirement.
Umm… in 2060? What’s $13k a year going to worth in 2060?
Who knows? Probably not much. Will there even be a Canada or Ontario in 2060? Who knows?
But I don’t get it, why so little? How much am I contributing to collect that amount?
Your payroll will be deducted 1.9% of income and your employer will be forced to match that contribution, so effectively every year an amount equal to 3.8% of your income will go into the plan. Government pension plans usually return about 2% per annum.
What? That’s worse than the stock market!
Yes, it is.
But then why not encourage people to save and invest on their own, they’ll have a better return?
Because governments have been doing that for 30 years, and the rates of savings are still not going up. The Liberals need to come save us from ourselves.
But surely some people are saving money!
They are, but it’s just a different manifestation. Household equity has increased 76% since the late 80’s – people put their money into their houses, real estate and other non-obvious retirement investments. It’s not the best of ideas, but between high mortgage costs, high taxes and increases in the cost of living, perhaps there isn’t as much disposable income available for savings.
So why do this?
The ORPP is being sold as a needed supplement to the CPP, but it’s really just another revenue tool for the Ontario government. They’re too scared to actually raise taxes, so they’ve come up with this clever scheme to take money out of our pockets – for our own good.
Sure. Consider that there are approximately 4.5 million Ontarians with incomes over $30,000 per year. If we take the 35% ORPP exemption rate that still leaves 3 million potential contributors. If the mean income is $31,800 per year, a 3.8% contribution deduction probably equals about $3 billion per year.
Wow! Where does all that money go?
If it’s similar to the CPP, that pension invests in a mix of private equity, debt and infrastructure. Debt = Ontario government green bonds. Infrastructure = Ontario Hydro One and other pet infrastructure projects in the province that the province will sell shares in.
Wait… so a lot of that ORPP money will just come back to the government in terms of general revenue?
Yep. So it’s essentially just another tax to help Wynne bank roll her government’s addiction to spending.
Wow. That’s downright dishonest and deceptive.
Welcome to Ontario.