Labour group says expansion will help Canadians, business group disagrees
In December 2012, Canada’s finance ministers announced they had a “way forward” on expanding the Canada Pension Plan (CPP).
Federal Finance Minister Jim Flaherty said officials would spend the next six months evaluating what a “modest” CPP increase might look like and explore whether the economy would be strong enough to support such a change.
The Canadian Labour Congress (CLC) is one of the largest proponents for an expansion, but called the December announcement a “disappointment” because a definitive action plan hadn’t been produced.
The CLC has proposed a gradual doubling of CPP benefits over seven years. By increasing CPP contributions by 0.43 per cent of pensionable earning each year, the maximum CPP benefit would rise from its current level of $12,150 a year to $24,300, the group claims.
On the other hand, the Canadian Federation of Business (CFIB) — one of the main critics of a potential CPP increase — says any increase in CPP premiums is unaffordable and would result in job losses.
In May, the CFIB published an update of its Forced Savings report, which originally looked at the impact of expanding the CPP in 2010. The report evaluated a “10-10-10 proposal,” which would hike CPP benefits by 10 percentage points from 25 per cent to 35 per cent of maximum pensionable earnings (MPE), raise the MPE by $10,000 to $61,000 from its current rate of $51,100, and implement all of this within 10 years.
This is what a modest increase would look like, the group claims, adding it would end up costing the economy 700,000 person years of employment over a 20 year period and decrease wages by 1.5 per cent.
“One of the impacts of that would be that as an employee, you would actually see your take home income go down each year for 10 years,” says Dan Kelly, CFIB president. “So, on Jan. 1, instead of looking forward to a small raise, you would actually see your take home income go down.”
Critics may argue a CPP premium hike doesn’t mean workers wouldn’t still get a wage increase in the new year, but Kelly counter argues that increased financial costs could limit an employer’s ability to provide a wage hike.
“We feel it’s quite likely that not only would the payroll budget of a business be hit each year for 10 straight years, but that the take home income of an average Canadian could go down each year for 10 years,” he says. “I don’t know a lot of Canadians who feel like they have enough disposable income that they could see their wages drop for 10 years.”
When employers reduce contributions in one area to accommodate costs in another area, it’s called a “carve out,” according to Kevin Milligan, an associate professor of economics at the University of British Columbia in Vancouver. This concept occurred when the CPP was raised in the early 1990s, he says.
“Imagine a firm is offering a pension of some kind and the CPP gets bigger, well essentially they shrink their own pension they’re providing their employees to account for the fact that CPP is bigger,” he says.
It’s also commonly seen in unionized environments when new savings programs are introduced in a collective agreement.
“It’s not necessarily something that the unions are opposed to because they want a decent pension for their employees,” he says. “But if they’re already getting a decent pension, they don’t need that plus CPP.”
Employers may favour a CPP expansion because it’s often the least expensive pension option available, Milligan says.
“If the government is doing it and they’re doing a good job at it and they’re doing it cheaply, it’s a pretty good deal for small- and medium-sized businesses,” he says. “I’m sure guys in the pension industry would tell you why that’s wrong, but there is a case to be made that… investments are being managed well, they’re being managed cheaply, and getting good returns compared to benchmarks.”
The CFIB supports the concept of a Pooled Retirement Pension Plan (PRPP). A PRPP is a defined contribution (DC) pension offered by a third party financial institution, such as a bank or insurance company. In a regular DC plan, the employee and the employer contribute a certain amount to the employee’s pension each year. In the case of PRPPs, though, employer contributions are optional.
In June 2012, federally regulated employees were offered PRPPs when the federal government passed Bill C-25, the Pooled Registered Pension Plans Act. Provincial and territorial governments must adopt their own PRPP legislation for them to be available to non-federally regulated employees in each region.
The following provinces have drafted legislation to introduce PRPPs: Quebec, British Columbia, Saskatchewan and Alberta. Ontario committed to consulting on PRPPs in its 2013 budget.
There are two advantages to a PRPP plan, according to Kelly.
The first is that management fees on PRPPs are lower than group registered retirement savings plan (RRSP) plans, which are a current option for employers wanting to offer employees a pension plan. Only about 20 per cent of CFIB members provide a group RRSP, which proves employers aren’t able to provide costly pension savings, Kelly says.
“Second is that the contributions from the employer wouldn’t be taxed,” he says. If an employer is currently contributing to an employee’s RRSP, it is required to pay employment insurance, workers’ compensation premiums and provincial payroll taxes on the amount contributed.
“That can add about 20 per cent more to the costs for the employer to offer the plan,” he says. “The PRPP — because it would be a pension — would be exempt from payroll taxes.”
The CLC argues employees won’t offer PRPPs because they are voluntary. The CLC uses the CFIB’s Forced Savings report to support their claim: Nearly two thirds of CFIB members indicated they wouldn’t consider offering PRPPs.
Even if officials recommend expanding the CPP, any amendment to the CPP requires the agreement of two-thirds of the provinces representing two-thirds of the population plus the federal government.
