Ontario Premier Wynne has been a vocal critic of the Canadian Pension Plan (CPP) for not providing Canadians with enough savings to live off during retirement. She is right. But the CPP was never meant to be our sole source of retirement income, and by building a secondary scheme on top of the CPP, modelled after the CPP, she will merely ensure Ontarians have less after-tax money to save and prepare for their own retirement.

There are two major problems with the CPP that most politicians refuse to recognize. First, the pay-as-you-go system means that people don't contribute to their own retirement fund, but instead, young workers contribute to pay the bills for those currently collecting. Some call this a Ponzi scheme. The scheme requires constant growth, but as rapidly retiring baby boomers start collecting and living longer than ever, the workforce is contracting and young workers are required to pick up more and more slack.

The second problem is that the program is a very bad deal for young workers. Not only will young taxpayers be forced to contribute more than ever, they will also receive fewer benefits from CPP. Early CPP recipients received 17 times more than they paid in, whereas young workers today will be lucky if they receive two-thirds of what they contribute over their lifetime.

Throwing money at a problem rarely makes it go away, and sometimes it just makes the problem much worse. At a time when most Ontario families are struggling to make ends meet and pay their soaring hydro bills, Wynne’s new Ontario Registered Pension Plan (ORPP) will claw back $988 annually from the everyday Ontario worker. If folks weren’t saving enough for retirement before, it will be a tough sell to encourage savings when take-home pay drops by almost $1,000. 

Instead of re-hashing the same stale policies of the 1960s and delivering more unrealistic and unfair promises, Wynne should look to innovative systems in Australia, Chile, or the over 30 countries that now have personal pension savings accounts.

In 1981, Chile replaced its national defined-benefit pension plan (much like the CPP), with a new defined-contribution system. All new workers were required to join this defined-contribution plan, while existing workers had a choice, but most chose the new system where they could decide where to invest their retirement savings. The results were surprisingly positive in many ways. It has created a 50 to 100 per cent increase in retirement benefits for workers, and according to an OECD report, has created a more equitable system that has promoted economic development, improved labour market conditions for workers, and given the overall economy is big boost. It is no coincidence that Chile has recently passed Argentina as the richest country in Latin America.

Australia’s reforms have been equally successful. Also set up in the 1980s in the face of an aging population and insufficient funding in state pensions, Australians are now required to contribute 9 per cent of their income into an individual account, which gets pooled into a national investment fund. Upon retirement, each Australian gets a lump-sum payout based on their contributions, employer contributions, and the market performance. Typically this means hundreds of thousands of dollars are paid out, giving far more freedom and flexibility to the recipient. The individual retirement plan also extends to far more of the population, as 92 per cent of Australians own a share in this savings pool, which is valued at over 100 per cent of Australia’s GDP.  

In the long run, the benefits of personal pension accounts far outweigh the short-term pain of making the switch. In both Australia and Chile the decision has paid dividends. By allowing individuals to be in the driver’s seat of their own retirement savings, these polices have helped to create a financial strategy with long-term sustainability that is fair to all workers.

Ontario should work to promote retirement freedom, not more dependency on government.