Ontario will create a provincial pension plan designed to double retirement income as savings fail to keep up with the swelling ranks of seniors in Canada’s largest province.
The proposed Ontario Retirement Pension Plan, modeled on the federal Canada Pension Plan, would be the first of its kind by any province, according to the 2014-15 budget released yesterday.
Ontario said it’s forging ahead with a public plan after the federal government decided against enlarging the CPP. More than 35 percent of households won’t have sufficient savings to maintain similar living standards in their retirement, Ontario Finance Ministry studies show, while seniors will account for 24 percent of the province’s population by 2035, up from 15 percent now.
“Unless we take action, future generations of retirees will be left with a lower standard of living,” Finance Minister Charles Sousa said, according to the text of the budget speech. “Since the federal government won’t lead, Ontario will lead by developing a made-in-Ontario solution.”
The province plans to introduce the program in 2017 with an initial target of three million employees, taking in annual contributions of about C$3.5 billion ($3.2 billion), which would be invested. The program could be integrated into the CPP at a later date. Those participating in a comparable workplace program would not be required to enroll.
“There’s always been a long-standing concern about people in the workforce who don’t have a plan,” Mary Webb, senior economist at Bank of Nova Scotia said in the budget lock-up. “It’s very hard for households to save. The government is focused on the middle.”
The Ontario plan would boost retirement income by as much as twice as what a worker could expect from the CPP alone, for a combined maximum lifetime benefit of C$25,275, according to the budget. Contributions would be split equally between workers and employers, not exceeding 1.9 percent each on earnings up to a maximum annual C$90,000. Together with CPP, the program would replace 30 percent to 40 percent of pre-retirement income.
Under current CPP guidelines, workers who participate cannot contribute on amounts above a maximum earnings threshold, yielding a maximum benefit of only about C$12,500 a year and an average of C$6,400 nationwide.
“These amounts are not high enough to allow workers, particularly middle-income earners, to maintain their standard of living in retirement,” according to the budget.
The ORPP would be administered at arm’s length to the government and the province will consider how to leverage the expertise of Canada’s largest pension funds as it designs the plan.