Weekly Wrap: Voluntary CPP expansion, Social Security fixes, Longevity Insurance, Tontine Annuities

View of  Ottawa on the Grunge Canadian Flag

A lot of coverage this week for the Tories’ floating of a “voluntary” expansion of the Canada Pension Plan (CPP: Canada’s equivalent of Social Security, if you also include its Old Age Security program), especially when you consider the details were pretty scant.

Incidentally, the issue is quite similar with Social Security in the U.S. This week, Reuters ran a piece entitled How to use Social Security to fix Retirement Inequality. It makes the case for “expanding” Social Security benefits “to help people who need it most.”

The Hub ran two pieces on the proposed CPP expansion: an initial one that felt it looked promising, despite the lack of detail: Bring it on!, followed by a guest blog by Retirement Redux’s Sheryl Smolkin: Voluntary CPP contributions will favour high earners.

Time to bring back Tontine Annuities?

We followed with  a couple of related pieces featuring author Moshe Milevsky’s proposals for resurrecting tontine annuities as a 21st century remedy for the combined ills of declining Defined Benefit pension coverage and ever rising life expectancy levels. My MoneySense blog on this ran under the headline Tontine: Retirement Plan of the Future? Milevsky’s guest blog that ran Thursday was titled Reintroducing Tontine Annuities Might Shave Years off your Findependence Day. (And no, we did not write that headline: Dr. Milevsky did!)

We at the Hub believe Milevsky’s idea for reintroducing a 17th century idea (tontines) should be examined in the context of the CPP expansion. While tontines are rare in the world right now, they more or less already exist in disguise: the most prominent example cited by Milevsky being the New York City-based TIAA-CREF, which Milevsky says uses a “tontine-like” system to adjust payouts.

Plenty of recent fixes for the Canadian pension system involve capital appreciation plans like the PRPP (a kind of Defined Contribution system) and indeed the TFSA, RRSP and others. None of these are what Milevsky calls a ‘true pension,’ which he defines as something with a guaranteed payout for life.

The CPP as it now exists can be viewed as a being like a Defined Benefit plan, in so far as it promises to make payments as long as you live, and with inflation adjustments. But in his piece this week  — Terence Corcoran: They’re off on the great CPP pension balloon ––  the FP’s Terence Corcoran suggests that “It follows the voluntary CPP would have to be some form of defined contribution scheme, in which investors receive benefits based only on their own contributions plus the ability of the CPP to deliver a return on investment.”

Whether voluntary or not, the Post’s Andrew Coyne argues There is no need to expand the CPP.

Over at the Globe & Mail, two columnists weighed in on the possible expansion. Rob Carrick wrote that CPP expansion would be a big win for investors while Ian McGugan argued instead that CPP reform is wishful thinking. Here’s a more realistic alternative.

We need more TRUE pensions

I don’t think we need yet another DC-like plan. The attractive part of a CPP expansion would be if it provided the longevity insurance benefits of DB plans for the huge chunk of the population that lacks the guaranteed DB plans that civil servants and politicians themselves enjoy, as well as some corporate executives. If the idea of sharing longevity risk makes sense, surely the CPP coverage is a broad enough pool in which to share risk.


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