Moving forward with CPP expansion
Last month the finance ministers reached a historic agreement to expand CPP. This has been hotly debated for years with no action, but it was finally made official. With support from all the provinces except Quebec, the federal government finally had enough support from the provinces to expand CPP. This was years in the making and will help address the fact that some working Canadians aren’t saving enough for retirement.
The most common argument against CPP expansion is that this is hardly time for a tax hike since the economy is weak. The good news is CPP expansion represents a modest increase equally shared by employers and employees. CPP premiums will gradually rise one percentage point from 4.95 percent to 5.95 percent phased in over five years, starting in 2019. For a worker earning $50,000, it only represents $25 more a month. This represents an affordable increase for small businesses, giving them plenty of time to adjust.
Expanding CPP means expanding coverage
The late, great Conservative Federal Finance Minister, Jim Flaherty, once famously said about CPP expansion: “The group that needs helps pension-wise is 23 percent or 25 percent of the Canadian population. You don’t want to use a bazooka to go after a specific issue. You want to be more targeted, more precise.”
Although CPP expansion won’t help those already receiving CPP and baby boomers entering retirement, it’ll help ensure younger and middle-aged Canadians are saving enough for their golden years.
CPP expansion specifically targets above-average wage earners not saving enough for retirement. Previous CPP contributions were capped by the Year’s Maximum Pensionable Earnings (YMPE). At $54,900 in 2016, the YMPE was simply too low for many Canadians. Although there are other savings vehicles like RRSPs and TFSAs, not enough Canadians are taking advantage of them. Under CPP expansion, new, higher maximum pensionable earnings will be phased in over two years, rising to $82,700. The premiums for income between $54,900 and $82,700 will be slightly lower at 4.0 percent.
A major worry of CPP expansion is that it would hurt low-income earners and lead to clawbacks of the Guaranteed Income Supplement (GIS) in retirement. Well, the government has even addressed that by boosting the working income tax benefit (WITB) to account for the higher premiums.
CPP expansion replaces the ORPP
Expanded CPP is much better than the next best alternative, the Ontario retirement pension plan, which would have been a lot more costly for both employers and employees. It would have also represented a patchwork solution to a complicated problem.
CPP expansion is a change in tone from the Conservative government who had a different philosophy on retirement savings. The Tories boosted the annual contribution limit to $10,000 a year for the TFSA. The Conservatives also raised the Old Age Security age from 65 to 67. Both measures have since been reversed by the Liberals.
Overall, it was a bright day for retirement savings in Canada. The newly-elected Liberal government proved that “sunny ways” isn’t just a cute catchphrase. It can actually get stuff done. Here’s hoping the Liberals can deliver on the rest of their election promises in such a timely fashion.