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 that 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.

Government Claw Backs

A major worry of CPP expansion is that it would hurt low income earners and lead to claw backs 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.

Written by Sean Cooper

Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.

10 Responses to Moving forward with CPP expansion

  1. I still think it’s a mistake.

    We saw this week that our exports are suffering. Partly because of the payroll taxes borne by employers, and we just continue increasing those.

    The people who don’t prepare for their retirement will not change their lack of responsibility; they’ll just continue to rely on the nanny state.

    And it’s still called the Canada Pension Plan, when it’s intended as a supplement, a safety net for a personal pension plan. It should actually be named the Canada Supplement to Personal Pensions plan; it just sends a different message.

    Would you rather call strawberry jam “red jam”?

    The people who don’t have enough earnings to save for a Personal Pension Plan are now paying more from their pay cheques. They now have less disposable income. It’s not a large amount, you say? Then why not just forget it.

    These people are also benefiting less from RRSP contributions than the richer people who, because of their higher tax rate, get a greater benefit, while paying a small percentage in CPP because of contribution ceilings. The richer are the beneficiaries, again.

    • Claude,
      No easy solutions. My whole financial world fell apart with a divorce 25 years ago.
      I have rebuilt but will work to over 65.
      My thought is government debt, with ongoing deficits is killing us.
      The tax burden you refer to would be much less if we did not have a 600 Billion Federal debt plus a 300 Billion (Ont) Debt to pay for.

      Everyone is concerned about what will happen to people who have to much mortgage when rates go back up. I wonder what will happen to our governments’ “mortgage” debt payments?

      • John,

        I’m selfish. I work at what I can control and ignore the rest.

        That said, I believe in OPM; this is a good time to borrow wisely for enhanced returns in the near future for me, the long term for governments.

    • The Radical Right and their greed that kept thousands of people unemployed or underemployed(@min-wages)now wants to point finger’s at the marginalized folks who had little say in the game of deliberately laying people off so shareholders got their dividends. The part time worker’s now flooded with the foreign student programs and the TFW’s going on for years taking Jobs from Canadians. Red Jam is an insinuation of communists as the Radical right government in Canada(HARPER)(Christy CLARK)fell over backwards to see who could sell out Canada and BC the fastest! RRSP’s are a joke when you make under $20 per hour,I think you should look and see how many educated people are stuck in minimum wages through no fault of their own, but corporation hording every penny in off shore accounts and owe billions in TAXES.GET YOUR STORY RIGHT FOR A CHANGE!Stop the conservative spin!

  2. Saving enough for retirement on your own is a difficult proposition. Not possible, for all, difficult from many and a walk in the park for some.

    Why?
    Low minimum wages, lack of sell-discipline, I-Want-it-all mindsets that lead to worse than no saving, – it leads to debt, High taxes, globalization, many people without skills.

    Did I mention High government Debt? The ON retirement program which helped at least 0 people retire cost the Ontario tax payers 70 million dollars. (Ontario Debt is now – $300,436,000,000 300 billion dollars – Each man, woman and child owes $21,000 (http://www.debtclock.ca/provincial-debtclocks/ontario/ontario-s-debt/). The Federal debt is another $629,651,000,000.00 622.5 Billion. Each gender not specified adult and child owes an additional $17,500 (http://www.debtclock.ca).
    All this to say, that if there was NO government DEBT then life would not be so difficult.

    But I do think the changes in CPP are good. You do know that they are not very large? Under current CPP the maximum benefit is.
    Current max ANNUAL CPP benefit is $13,110. Under the new and improved plan that rises by an AMAZING $4368/y to 17,478/year $1456.5/m.
    This ignores the early and late retirement penalty/benefit.

    Yes I am a bit cynical even if I am happy to see the change.

    The not so sub-text of my posting is, wouldn’t it be nice if our governments WATCHED the million here, million there, etc they spend creating an UNBELIEVABLE DEBT.

  3. Claude – a good many “richer” people will die with large rrif’s and their estate will pay the max income tax rate on the balance. That rate is likely higher than that which they got to deduct originally. And you also need to factor in that RRIF’s in some cases put people into or above OAS clawback territory so they effectively get supertaxed for trying to provide for themselves and not be part of the nanny state you speak of. (Zero RRSP’s – RRIF’s for me!)

    A lessor income person while working gets a lessor income tax deduction but when they retire many will pay a even lower tax rate on there RRIF or indeed no tax at all. Some intentionally use it quickly so they can claim more GIS (and other benefits)

    Sean – How are we to determine whether the increased employee/employer costs will actually properly fund the increased benefits over the long term? Phase in is just a sales pitch like getting Telus at a reduced rate for 6 months.
    I haven’t heard anything from those with a fiduciary duty to CPP say these numbers are doable long term and I don’t believe politicians numbers. Where did they come from? So far I haven’t heard that more benefits will be paid to those existing or soon to be receiving CPP but just wait the politicians love to spend future generations money for immediate political gain so that might be the next shoe to drop and … return the now properly funded CPP to the former Ponzi Scheme that it was.

    How does the WITB correlate to GIS? Please explain.

    Please say what it really means “gives the employers plenty of time to adjust” It’s plainly obvious that the costs of services and products will rise as there is a direct cost to employers. Oh yes and as the employee will have less disposable income they will demand more pay. Many employees simply see it as a tax deduction and don’t appreciate the long term benefit. No employee will mentally adjust their hourly rate when their employer’s hourly costs rise to keep them employed. Why can’t we just candid.

    Lowering the age 67 back to 65 was just stupid. At least it should have been accompanied by a de-indexing or a reduction of the OAS clawback level.

  4. @Dave-let me guess your plus 60? And you were luck to ride the demographic curve to a relatively easy retirement.

    Personally, I don’t think the government should have raised the age to 67 in the first place. They need to adjust and expand CPP so that its more than its original intention. Since the 80’s there has been an attack on the workers pension benefits, wages and jobs. Our corporate elites (those with the unused large rif’s at death-btw) have attacked pension plans in Canada. Now 3/4’s of Canadian’s don’t have pension plans and the off shoring, outsourcing and layoffs have negatively affected many industries, jobs and certainly those workers who are over 40.

    Try looking for a job over the age of 50. I know many very good STEM professionals that have found themselves in “no work” situations for years. They have eaten away there RRSPs in order to survive and …. Oh yes, these are the very workers who the government claims we need due to a skill shortage. Hog wash.

  5. AFD …. LOL !

    In my 60’s but if spending restraint, keeping debt free, saving and investing for retirement makes me “lucky” then I am and you can count me among that all too small cohort within all demographic groups that do it.

    I actually favour the planned CPP increase because it is mandatory. PROVIDED it’s actuarially being fully funded from the start AND the additional benefits only accrue to those who make the higher contributions. My fear is that those who haven’t made the extra contributions will get extra benefits all at the expense of our next generations.

  6. I’m curious as to the effect on government pensions, such as the military. Their current pension is 2% of their salary per year served (so 50% for 25 years service). Will their contributions to the military pension fund decrease as a result of their CPP being a greater portion of the 2%/year, or will they keep the same pension contributions and end up having greater than 2%/year served.

    • Tom – That’s a great question, but unfortunately there is no answer at this time. It should however, be one of the two possible outcomes that you describe.

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