The Ontario Retirement Pension Plan (ORPP) was one of Premier Wynne’s key campaign promises, one that has resurfaced after her Liberal government recently provided more details about the plan and how it will be implemented.
Although a number of details have been released, the plan itself is not yet set in stone. However, it is now certain that with a phased-in contribution schedule and payouts not beginning until 2022, the plan will have little to no impact on today’s Baby Boomers and Zoomers across the province. Still, experts are predicting an economic impact and potential job losses now as employers prepare to find the funds to support the ORPP.
The ORPP is a new provincially managed pension plan, similar to the Canadian Pension Plan (CPP) which will only affect Ontario residents. The goal of the plan is to ensure all working Ontarians have a workplace pension plan in place when they retire. The province estimates that the plan will impact approximately 3.5 million workers. Employers will have to match employee contributions, which are capped at 1.9% each (3.8% combined) on an employee’s annual earnings up to $90,000.
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Unlike the National Employment Savings Trust in the United Kingdom employers and employees cannot opt out of the ORPP, a rule which is drawing criticism from experts. However there are exceptions. Employers who already offer a comparable workplace pension plan, low-income workers who make below a threshold amount and self-employed individuals will be exempt from the ORPP.
There are a number of similarities between the two plans, but, according to Janet McFarland of The Globe and Mail, the largest difference is that CPP contributions max out at an annual income of $53,600 while the ORPP will max out at an annual income of $90,000.
The ORPP will be implemented in four waves over four years, starting January 1st, 2017. By 2020 all eligible employees will be contributing to ORPP, with the first payouts occurring in 2022. This means that most Boomers and Zoomers will not need to participate in the ORPP, and those who do and plan to retire in or after 2022 will see a minimal payout because they will not have contributed long enough to earn large benefits.
Based on this knowledge, the ORPP shouldn’t impact the way Boomers and Zoomers across the province are saving for retirement and is not likely to have bearing on when they choose to retire.
The Ontario government is concerned with the financial state of retirees in the province, many of which have not saved enough to continue their middle-class lifestyle in their retirement years.
The ORPP is based on the concept of “inertia”, meaning that “people value today more than they value tomorrow,” explains Erin Obourn of the CBC News. Although people should save for retirement, many choose not to, which is why the government is initiating this mandatory program.
As well, the Ontario government sees a shortfall with the CPP, which is minimalist compared to other countries. For example, the CPP maxes out at $12,500 a year, while in the United States social security maxes out at almost double that. Compared to countries like Germany, France and the United States, Canadian pensioners are expected to live extremely modestly on small government pensions.
While many financial experts point out that making the program mandatory allows the government to operate the pension plan on a large scale with low overhead, other critics, like financial author Gail Vaz-Oxlade point out that with minimum wage so low, many Ontarians are simply unable to save for retirement. She suggests instead that the government shifts its focus to ensuring everyone has a livable wage.
Many businesses in Ontario are up-in-arms over the plan, which will require them to contribute 1.9% of their payroll expenses. Some are suggesting layoffs or hiring freezes will be the only way they can cope with the added expense.
However, Lauchlan Munro, director of the University of Ottawa’s School of International Development and Global Studies told CBC News that 50 years ago businesses “said the same thing about the CPP. This is modeled closely after the CPP. Any time someone comes along with such a proposal, some object.”
What do you think about the ORPP? Would you have liked to see a provincial retirement pension plan introduced earlier on? Do you think other provinces will follow suit? Share your thoughts with us in the comments below.