As we are being encouraged by politicians and influencers to turn inwards and buy more goods & services that are Canadian, I have a modest proposal to make. My suggestion also has an additional benefit that will ‘hit’ a few other important ‘birds’ with the same ‘stone.’ Namely, I would like to recommend that Canadians be allowed to buy more of something that is manufactured in Canada, that supports many Canadians already and is actually envied around the world: Our beloved CPP.
The Canadian Pension Plan (CPP), as everyone who contributes or benefits from it knows, is a national pension scheme in which Canadians contribute approximately 6% of their wages over their working life, and in exchange are entitled to a pension annuity of approximately 30% of their best year’s wages, when they retire. Yes, this an idealized description of a rather complicated plan – all those government actuaries do need employment – and employers have to contribute their own 6% to your pot as well. You can read much more here and then explain things as complicated as you like. But the end-result is that when Canadians retire, they get access to a real inflation-adjusted life annuity that pays them an income for as long as they live. Your money or income from the CPP is then on autopilot, without having to worry about having a financial advisor or trusted family member help you ‘decumulate your wealth’ at an advanced age. Indeed, one of the first things to deteriorate as you get closing to the centenarian years, is your cognitive abilities to manage money. Good luck with price-to-earnings ratios at 95.
Speaking historically, national pension plans are the mark of a modern and civilized society. And, the design, management and governance of the Canadian Pension Plan has been lauded by international pension specialists and observes from around the world. In fact, just a few months ago, when Rachel Reeves who is Britain’s Chancellor of the Exchequer visited Canada, she made a point to stop-in and chat with the managers of our largest pension plans, including the CPP. Our CPP is attracting the world’s attention.
Our CPP is so ‘good’ that if you wait half-a-decade to start your benefits, until you are 70 years old for example, the life annuity is increased by approximately 40%. And yet here is the puzzle, very few Canadians wait until 70 to claim their benefits, despite many commentators and public pension experts who have advocated for this exact strategy: Wait. How, do we get more Canadian to wait? Perhaps, counter intuitively, allow them to buy more.
Here is how my proposal would work. Starting at the age of 60, any Canadian would be able to voluntarily purchase ‘real income units’ of CPP that would begin making payments at the age of 70. To make this as tax simple as possible – hey, it’s the end of April and tax is on everyone’s mind – the option would only be available with your Tax Free Savings Account (TFSA), so the corresponding income would be tax free and wouldn’t result in the claw-back of retiree’s precious OAS benefits. The above-mentioned Government actuaries would waive their magic models and periodically update the price of these ‘real income units’ so that they are economically fair to everyone.
There are a number of additional economic and psychological benefits to making these ‘real income units’ available. At a fair price, I’m sure some Canadians will use their TFSA to purchase more of this longevity insurance – I most certainly will — which will help signal or message to the many other Canadians who take CPP early, that they are making a financial mistake. After all, if people are buying more of this ‘good deal’ then why are you selling. Second, and perhaps more importantly, it will offer Canadians a genuine way to guarantee a lifetime of inflation-adjusted income that isn’t subject to the vagaries of the stock market. Third, it will give everybody a true sense of what their CPP benefit is worth in present value terms. After all, multiply your benefit by the price of the ‘real income unit’ and voila, you will see your CPP is ‘worth’ a few hundred thousand – you are truly richer than you thought.
Now, I can just hear the great economist Adam Smith turning in his Edinburgh grave at the suggestion that government should get involved in yet another business that has been the domain of insurance companies for centuries. But in my defence, most Canadian insurance companies just haven’t shown much interest in designing and marketing innovative longevity annuities. This absence is for a variety of supply and demand reasons that Smith would recognize but is a type of market failure. In fact, the only private sector group that might be threatened by my proposal are those who manufacture mutual funds and exchange-traded funds, who would much rather retirees ride the stock market roller coaster until they loose their dinner and their faculties.
In sum, let’s allow Canadians the voluntary option to purchase more ‘real income units’ of CPP when they retire. Who knows, we could even allow our American neighbours to buy some as well, which would help them diversify their own retirement portfolio, subject to a small fee or tariff of course.
(A short edited version of this was published in the Globe & Mail on 20 May, 2025.)