Employers with Quebec payrolls could soon learn whether the provincial government will make changes to the Quebec Pension Plan (QPP).
In December, Quebec Finance Minister Carlos Leitão released a discussion paper outlining possible options for enhancing the plan’s retirement benefits. In January, a National Assembly finance committee held consultations on the issue.
The discussion paper, Strengthening the Plan to Promote Greater Intergenerational Fairness, asked for public input on whether the Quebec government should adopt changes that the federal government is making to the Canada Pension Plan (CPP), implement its own QPP proposals or leave the plan as is.
Last year, the federal government and all provinces but Quebec signed an agreement to raise the CPP’s income replacement level for retirement benefits from one-quarter of pensionable earnings to one-third. The higher benefits will accumulate gradually as individuals pay into the enhanced CPP. This means young workers just entering the workforce will see the largest increase in benefits.
To pay for the benefit improvements, the CPP contribution rate will gradually rise between 2019 and 2023 from 4.95 per cent to 5.95 per cent for earnings up to the yearly maximum pensionable earnings (YMPE). The rate increase will apply to both employers and employees.
In addition, beginning in 2024, the government will implement a separate contribution rate of four per cent for pensionable earnings between the YMPE and a new upper earnings limit. In 2024, the new upper earnings limit will be 107 per cent of the YMPE. In 2025, it will rise to 114 per cent (or about $82,700).
Last year, Leitão said Quebec did not sign the agreement because he was concerned it would not do enough to help low-income earners and the contribution rate increases could hurt Quebec’s economy.
Leitão also said any QPP changes must address Quebec-specific issues affecting the plan’s long-term sustainability. For instance, the province’s population is aging more quickly than in other parts of the country, putting more pressure on the QPP.
In addition, raising contribution rates in Quebec is more challenging because the QPP rate is already higher than the CPP rate.
“The objective of the consultation is clear: Establish a plan contribution rate compatible with the workers’ and employers’ ability to pay, and fund the plan to ensure its sustainability, which is inseparable from the security that the system must provide,” said Leitão.
The Quebec government’s QPP proposal, like the CPP enhancement, would increase the income replacement level for the plan from 25 per cent to 33 per cent and gradually raise contribution rates over seven years, beginning in 2019; however, the changes would only apply to those whose YMPE exceeded $27,450.
The Quebec proposal also calls for the federal government to implement an additional income exemption for calculating benefits under the Guaranteed Income Supplement.
This change could help low-income seniors today, said Leitão.
Since the Quebec enhancement proposal would only apply to pensionable earnings above $27,450, the discussion paper states that overall QPP retirement benefits would be lower than they would be under the enhanced CPP, but Quebec workers would benefit from having to pay less in QPP contributions over their working lives.
Limiting the rate increases for benefit improvements to earnings over $27,450 would also be better for employers in the province, said the paper: “Payroll deductions by Quebec employers are already the highest in Canada.”
When comparing the QPP’s and CPP’s “effective contribution rate” for a worker whose earnings are equal to the YMPE, the rate for Quebec employers is 15.13 per cent, compared with an average of 9.67 per cent in the rest of Canada, according to Quebec Finance Ministry data. The “effective” rate is the actual contribution in percentage of salary, given the current annual basic exemption of $3,500.
If the government implemented the Quebec proposal, the rate would rise to 15.63 per cent, compared to 16.07 per cent if it went with the CPP enhancement, said the paper. And employer rates will rise with both options, while “(the) CPP scenario would result in a greater increase to payroll deductions.”
The discussion paper also asked for feedback on possible measures to ensure the QPP remains sustainable and contribution rates are stable. While the plan’s finances are healthy, “it is still faced with many demographic and economic challenges that could affect its future.”
These include a longer life expectancy and changing retirement patterns. Discussion paper documents show that life expectancy at birth in Quebec was 82 years in 2013, up from 71 years in the mid-1960s. This means retirement pensions are being paid for a longer time.
In addition, on average, people in Quebec retire at an earlier age (62) than those in the rest of Canada (63), said the paper. While some older workers in the province choose early retirement, others over 60 opt to continue to work while receiving a QPP retirement pension.
Another factor is a decline in the population aged 20 to 64 in relation to the number of people 65 and up. In 1966, there were 8.2 people aged 20 to 64 for each person 65 and older. By 2015, there were only 3.5, compared to four in the rest of Canada, said the paper.
By 2030, there will be two people aged 20 to 64 for every person 65 and older in Quebec, compared to a ratio of 2.6 elsewhere in Canada, it’s estimated.
“Because the population of Quebec is aging more markedly, the proportion of retirement pension beneficiaries is greater in the case of the QPP than in that of the CPP,” said the paper.
Another factor affecting the province is that average weekly pay in Quebec is lower than it is in the rest of the country. In 2015, average weekly pay in Quebec was 9.6 per cent lower than the Canadian average.
“This means that the average income on which contributions are made is lower in Quebec, and this has repercussions on the reserves that these two plans build. For benefits to be comparable, the QPP contribution rate has to be higher than that of the CPP,” it said.
The two rates were the same until 2012 when the provincial government began implementing annual rate increases to deal with the plan’s financial pressures. For 2017, the QPP rate is 5.4 per cent, compared with 4.95 per cent for the CPP.
Beginning in 2018, an automatic adjustment mechanism will increase the QPP contribution rate by 0.1 per cent per year if needed to keep the plan in balance.
The discussion paper proposes a number of options to ensure the QPP remains sustainable and contribution rates will be stable going forward. They include:
• Increase the minimum age to become eligible for an early QPP retirement pension. It is currently 60 years old. While the paper did not recommend a specific age, it stated that an increase in the eligibility age would encourage older workers to remain in the labour market longer. This would not only decrease pressure on QPP retirement pensions, it would also lead to more people 60 and over paying QPP contributions, helping to keep contribution rates stable.
• Full funding of QPP benefit improvements. Any improvements in benefits would be paid for as much as possible by those who will benefit from them rather than by another generation.
• Introduce a longevity factor that would reduce new pensions based on increases in life expectancy beyond a selected threshold.
Once the government reviews the feedback it received during the consultations, it is expected to announce how it will proceed with any QPP changes. It is possible the government could put forward its plan when Leitão tables this year’s provincial budget, expected in the spring.
Sheila Brawn is the Toronto-based editor of Canadian Payroll Reporter, a sister publication to Canadian HR Reporter.
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