Recently, CARP, the over-50 lobby group proposed that Ottawa introduce a Universal Pension Plan (UPP) modelled on the Canada Pension Plan (CPP) for the 1 in 3 Canadians without any retirement savings. Details on how the UPP would work are sketchy but the proposal says that it should replace 70% of earnings up to $116,667 and mandatory contributions from employers and employees in the range of 20% of income. Recall that the CPP currently provides a maximum pension of $10,905 in 2009 and the contribution rate of both employers and employees is 4.95%.
I’m not sure I like this idea. We already have Old Age Security (OAS) and Guaranteed Income Supplement (GIS), in addition to CPP to ensure that seniors have a certain basic standard of living. Employees who do not have a defined-benefit, gold-plated pension plan are required to take the initiative to save and invest wisely on their own in their RRSPs. Unlike a defined benefit pension, which is simply a promise to provide an income stream starting at a certain age, RRSPs provide us with total flexibility. The capital accumulated within a RRSP can be tapped at any age without any restrictions. It can be drawn down in retirement and the reminder left to heirs. A portion or the entire capital can even be used to purchase an annuity from an insurance company to provide an income stream in retirement. In short, a RRSP provides a lot of choices in retirement planning and the beneficiary accepts the risks as well as the rewards.
In a thread discussing the UPP on Canadian Money Forum, Mike H. put it best:
However, a mandatory pension plan to ‘level the playing field’ for everyone is just a wealth transfer from the wise or lucky; to the foolish or unlucky. The economic promise of Canada as a nation is twofold. The first is relative equality of opportunity but NOT equalization of result. The second is that we will take care of those people in our society who can’t care for themselves. But it’s a “Here’s your free bus pass” kind of care; not “Here’s your new car every five years and a trip to Florida”. You have to earn those!
