A retirement plan such as Australia's would offer greater choice and flexibility for residents, Fraser says
TORONTO—As the Ontario government moves forward with plans to implement a new mandatory provincial pension program, a Fraser Institute study has found Australia’s system of forced individual retirement saving accounts could serve as a model for the new program, instead of the Canadian Pension Plan.
“If Ontario insists on launching a mandatory provincial pension program, despite evidence that it’s unnecessary, Queen’s Park could learn from Australia about how to design a system distinguished by choice and flexibility,” Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of the study, said.
The Fraser noted that early signs suggest that the Ontario Retirement Pension Plan, which is set to launch Jan. of 2017, will be largely modelled after CPP. However, it found Australia’s individual retirement saving accounts, which more closely resemble Canada’s RRSPs, offer more choice and flexibility than the collective CPP model.
Under the Australian system, which is fuelled by 9.5 per cent employer contributions, Australians can choose how to invest the money in their retirement accounts based on their personal preferences and circumstances. Australians are also able to withdraw funds from their individual accounts prior to retirement for medical emergencies or during times of financial hardship. All contributions and earnings in the accounts accrue directly to the individual, and upon death, account balances can be transferred tax-free to a dependent.
“If Ontario’s provincial pension plan ends up mirroring the CPP, Ontarians will lose out on the greater choice and flexibility offered by other models of mandatory retirement saving,” Lammam said.
There are other significant differences between the collective CPP model and Australia’s individual retirement saving accounts, the Fraser said. Most notably, Australia’s scheme is a defined contribution plan, meaning the level of retirement benefits is dependent on how investments perform.
Defined benefit plans like the CPP – where beneficiaries receive a specified monthly benefit – are subject to a different set of risks, according to the Fraser. For example, under-funding of the plan or changes in the rules by the government could lead to increased contribution rates or reduced benefit payments. Moreover, the CPP model concentrates investment risk in a single public-sector asset manager, unlike Australia’s individual retirement saving accounts, which spreads the risk among multiple private sector fund managers.
“Past research has shown there isn’t a widespread under-saving problem and that forcing Ontarians to contribute more to a government-run pension plan will reduce their voluntary private savings. But if the government is adamant about pursuing a new pension plan, it could follow the Australian model to at least give Ontarians choice and flexibility,” Lammam said.