As part of its plans to strengthen Ontario’s retirement income security, the province’s Ministry of Finance is looking for input on its proposal for a “modest” expansion to the Canada Pension Plan (CPP).
The discussion paper Securing our Retirement Future: Consulting with Ontarians on Canada's Retirement Income System outlines the challenges facing Ontarians and all Canadians when it comes to a stable and secure retirement income.
“We must build on the strengths of the CPP through a modest expansion of benefits,” said Finance Minister Dwight Duncan in the paper. “The CPP is secure, efficient, portable and fiscally sustainable but there will be increasing pressure on it as the population ages. In Ontario, over the next 20 years, the number of people over age 65 will nearly double. A modest enhancement to the CPP now would provide a significant benefit to these workers when they retire. I believe such an enhancement is affordable if contribution rates are phased in gradually, particularly in light of the over $8 billion in annual tax relief Ontario will be providing to businesses as part of its tax plan.”
There are three main approaches to expanding the CPP, according to the discussion paper:
1. Increase the replacement rate: Increasing the maximum replacement rate from the current 25 per cent to a higher rate, such as 35 per cent.
2. Increase the earnings ceiling: Currently, workers cannot earn CPP entitlements on earnings above $47,200. The earnings ceiling could be raised by, for example, 1.5 times to $70,800, or be doubled to $94,400.
This approach would benefit contributors whose annual earnings are higher than the Year’s Maximum Pensionable Earnings (YMPE) at least some of the time, including those who had relatively low earnings early in their careers but whose wages rose later in life.
3. Increase both the replacement rate and the earnings ceiling: This approach would benefit all CPP contributors.
Approach 1 would increase the current replacement rate for all contributors, but particularly for those with low- to middle-career average earnings, according to Securing our Retirement Future. Approach 2 would increase the replacement rate most for those with middle- to high-career average earnings. Approach 3 would increase replacement rates for all earners, with middle earners benefiting from a proportionately higher increase.
The paper also calls for the need for more pension innovation. Regulatory changes “to harness Canada’s world-leading private-sector expertise” would provide more efficient, lower-cost retirement options, said Duncan.
“Current tax and pension rules state that pension plans can only be offered where an employment relationship exists. This limits the retirement savings options available to the self-employed and those who work for small businesses. By changing these laws, we can expand the range of institutions that can set up pension plans, and the range of people who can access them. Large pools of capital could reduce costs and help improve investment returns. “
Three approaches to pension innovation could include:
- new types of pension or retirement savings plan arrangements
- changing the treatment of group RRSPs
- establishing single-employer target benefit plans.
Ontarians and other Canadians are encouraged to give feedback on the discussion paper by Nov. 30, 2010, ahead of the federal-provincial-territorial finance ministers' meeting on Dec. 20.
The Ontario government’s plan to strengthen the retirement income system for Ontarians also includes modernizing Ontario’s Pension Benefits Act to enhance the reliability, security and affordability of employment-based defined benefit plans in Ontario.
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