As the Ontario government moves forward with plans for a new mandatory provincial pension program, Australia's system of forced individual retirement saving accounts could serve as a model instead of the CPP, finds a new study by the Fraser Institute.
"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," said Charles Lammam, director of fiscal studies at the Fraser Institute and co-author of Lessons for Ontario and Canada from Forced Retirement Saving Mandates in Australia.
Early signs suggest the Ontario Retirement Pension Plan, with a planned launch date of January 2017, will be largely modelled after the Canada Pension Plan (CPP). However, Australia's individual retirement saving accounts, which more closely resemble Canada's RRSPs, offer more choice and flexibility than the collective CPP model, said the institute:
• Australians can choose how to invest the money in their retirement accounts, which are fuelled by mandatory employer contributions (currently 9.5 per cent of eligible earnings), based on their personal preferences and circumstances.
• Australians can withdraw funds from their individual accounts prior to retirement, for medical emergencies or during times of financial hardship.
• Account balances can be fully transferred tax-free to a dependent upon death.
• All contributions and earnings in the Australian accounts accrue directly to the individual.
"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, said the Fraser Institute. 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. 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.
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