A pension system from halfway around the world would serve as a better model than the Canada Pension Plan for Premier Kathleen Wynne’s Ontario Retirement Pension Plan.

Australia’s system of mandatory individual retirement saving accounts offers greater choice and flexibility, and deserves a close look.

That country’s mandatory, employment-based pension approach more closely resembles Canada’s Registered Retirement Savings Plans (RRSPs).

Australian employers are required to contribute 9.5% of an eligible employee’s ordinary earnings to individual retirement accounts.

The Australian model has several distinct advantages over the CPP model Wynne is planning to introduce in Ontario as the ORPP.

Its accounts have limited rules around asset allocation and investment strategy, offering considerable flexibility to account holders.

Individuals can choose an investment strategy based on their preferences and circumstances.

The Australian plan is also flexible enough to allow withdrawals from the accounts prior to retirement for medical emergencies or during times of financial hardship.

Crucially, any balance in the accounts can be fully transferred in a lump sum to a dependent, tax free, upon death.

Finally, all contributions and earnings in the Australian accounts accrue directly to the individual.

These important benefits are unavailable in the collective CPP model.

There are other significant differences between that model and Australia’s individual retirement saving accounts.

Most notably, Australia’s scheme is a defined contribution plan, meaning the level of retirement benefits depends 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, underfunding of the plan or changes in the rules by government could lead to increased contribution rates or reduced benefit payments — something that has happened in the recent past.

Moreover, the CPP model concentrates investment risk in a single public-sector asset manager, unlike Australia’s individual retirement saving accounts, which spread the risk among multiple private sector fund managers.

If the Wynne government is determined to create a new government-mandated pension plan in Ontario, the Australian model of privately held individual retirement accounts is worthy of serious consideration.

But it is far from clear that any new forced savings program is needed at all.

The push is based on the faulty assumption most Ontarians are not adequately prepared for retirement.

In reality, the existing retirement income system serves the vast majority well, when we properly account for all resources available to Ontarians to support them in retirement.

In addition to government programs, such as the CPP and Old Age Security, Ontarians routinely rely on pension income from RRSPs and Registered Pension Plans, which are critical features of Canada’s so-called “three-pillar” retirement income system.

Apart from those, a full accounting of the resources available to retirees must include savings in Tax Free Savings Accounts, home equity (70% of Canadians own a home), land, businesses, cash deposits, stocks, bonds and other investments.

Retirees also rely on the support of family and friends.

Among the current cohort of retirees, the problem of retirement income inadequacy mainly affects single seniors living alone with minimal work history.

As a work-based program, the ORPP does nothing to help this group. And there’s the added reality the ORPP won’t increase overall retirement savings to the extent expected if Ontarians, in response to increased forced savings, simply save less voluntarily.

Without an overall boost in retirement savings, the end result is a reshuffling, with more money going to forced savings and less to voluntary savings. The risk, then, is that Ontarians will lose out on the flexibility of voluntary vehicles like RRSPs and TFSAs.

If the Ontario government insists on launching a mandatory provincial pension program, despite it being unnecessary, Queen’s Park could learn from Australia about how to design a system distinguished by choice and flexibility for Ontarians and their families.

— Lammam and Kirchner are co-authors of the Fraser Institute study “Lessons for Ontario and Canada from Forced Retirement Saving Mandates in Australia”, available at fraserinstitute.org.

© 2015 Distributed by Troy Media