Health-related premiums, payroll taxes entrenched in other jurisdictions
At 50, is it time for a change? If so, what kind of change?
The Canada Pension Plan (CPP) turned 50 on Jan. 1 and politicians across the country are wondering if the time is right for changing the program.
The new federal Liberal government has put CPP reform on its agenda, saying it wants to enhance the plan. In December, Federal Finance Minister Bill Morneau met with his provincial/territorial counterparts to discuss a number of issues, including potential CPP changes.
While the finance ministers did not announce any concrete CPP proposals, they did agree to continue looking at the issue and to meet over the course of the year to talk about possible reforms.
“Our goal is that in a year from now, we will have more to talk to Canadians about,” Morneau said in a news conference. “We are going to have a range of things under consideration, from doing nothing
because of the economy to more significant changes.”
Some have been calling for CPP reform for years, saying the plan does not provide adequate benefits for retirees, especially those without company pension plans who may not have saved enough money for retirement. With baby boomers about to retire in large numbers, they say the problem could get worse.
“Two-thirds of the workforce — 12 million working Canadians — do not have workplace pension plans, leaving most Canadians to rely on current CPP levels, private savings, OAS (Old Age Security) and GIS (guaranteed income supplment) for retirement income,” said the Canadian Association of Retired Persons (CARP).
“If nothing is done to provide a robust and safe way to plan and save for retirement, many Canadians will be financially unprepared and may experience significant drops in their quality of life in retirement.”
Hassan Yussuff, president of the Canadian Labour Congress (CLC) adds, “Without government action, we are going to see seniors’ poverty continue to rise.”
Provincial governments, including those in Ontario and Prince Edward Island, have said they want the CPP enhanced. And Ontario is taking steps to implement its own provincial pension plan, beginning in 2017.
Reform proposals
A look at reform proposals put forward in recent years may provide clues as to what Canada’s governments are considering.
One option is to raise CPP retirement benefits across the board so all retirees receive higher pensions. Currently, the CPP aims to replace about 25 per cent of an individual’s pre-retirement earnings, up to an annual maximum. The CLC wants to double the replacement rate to 50 per cent, with the change occurring over seven to 10 years.
The CLC says the increase could be paid for by a “modest” hike in employee and employer CPP contributions.
“The rate for CPP contributions was originally set up assuming that most workers would be able to supplement CPP savings with workplace pension plans. But now that employers are abandoning workplace pensions, the CPP is the only way in which most workers, especially young workers, routinely save for retirement,” the CLC says.
Another option is to increase the benefit level only for those in the middle-income bracket, possibly for those with incomes between $25,000 to about $100,000. The idea is that individuals with higher incomes have sufficient economic means to save for retirement and those with lower incomes have other government programs to help them in addition to the CPP.
Wes Sheridan, former finance minister for P.E.I., has suggested increasing the CPP’s target replacement rate from 25 per cent to 40 per cent only for those in the middle-income bracket. Other retirees would continue to receive benefits aimed at replacing 25 per cent of their pre-retirement earnings.
To pay for the changes, Sheridan suggested contribution rates go up by about 3.1 per cent (1.55 per cent for employers and 1.55 per cent for employees). Individuals earnings below $25,000 would not pay the higher contribution rate.
He also suggested the federal government double the annual maximum pensionable earnings (currently set at $54,900) to help pay for the increased benefits. He is not alone in suggesting the earnings ceiling go up to cover benefit improvements.
Bernard Dussault, a former chief actuary of the CPP, recommended in a 2009 study that the maximum pensionable earnings be raised to $122,222 to match the maximum amount of employment earnings used for calculating registered pension plan contributions.
His suggestion was part of a comprehensive reform proposal calling for the CPP benefit rate to rise to 70 per cent from 25 per cent (over many decades) and for registered pension plans and registered retirement savings plans to be eliminated.
Another option, suggested by the previous Conservative government, is to add a voluntary component to the CPP that allows individuals to make additional contributions. Employers would not be required to pay more contributions. The Finance Department asked for public feedback on this last summer.
A final option is to do nothing, to leave the plan as is. There is support for this option among some in government and the business community. Saskatchewan Finance Minister Kevin Doherty has expressed concerns about increasing CPP costs at a time when the economy is slow.
“We don’t think right now, at least in our province, that the business community can withstand another mandatory contribution with respect to the Canada Pension Plan. We are not saying never. We’re just saying right now is not the time.”
Doherty added that governments should give new retirement savings vehicles, such as pooled registered pension plans and tax-free savings accounts, time to grow in popularity before deciding that CPP enhancements are necessary.
“They are only about six years old now. We ought to let these kinds of products take effect in the marketplace. Allow Canadians to invest in them. Canadians need to take responsibility for their retirement security,” Doherty said.
The Canadian Federation of Independent Business (CFIB) shares these concerns. It sent a letter to the finance ministers ahead of their December meeting asking them to reject CPP changes that would increase mandatory contribution rates.
“Expansion of the Canada Pension Plan and Quebec Pension Plan is an issue of real concern for small business owners across the country,” it stated.
“While a CPP/QPP hike would be a challenge for small businesses at any time, the current economic climate is such that we cannot expect economic growth to offset the negative impacts that a CPP/QPP premium increase would have on businesses and workers.”
Not making any changes to the CPP may be the only option available to the federal government. CPP amendments affecting benefits or contribution rates cannot occur without the agreement of the federal government and seven provinces having two-thirds of Canada’s population.
“Any of the larger provinces could potentially veto the process. If both B.C. and Quebec withhold their consent, there will be no agreement to increase the CPP,” said Susan Eng, executive vice-president of CARP.
In the past, both provinces have expressed concerns about CPP reform. Coming out of the finance ministers’ meeting in December, finance ministers from B.C. and Quebec said they were open to discussing possible changes as long as the conversation includes potential impacts on the economy.
“At what stage is the economy healthy enough to begin increasing the amounts that employees and employers are required to pay?” said B.C. Finance Minister Mike de Jong.
Quebec Finance Minister Carlos Leitão said it is important to examine options for improving the CPP and the QPP.
“However, our work must take into account demographic change in Quebec, where the population is aging faster than elsewhere in Canada, the less favourable financial situation of the Quebec Pension Plan and the impact of any enhancement on the economy,” he added.
Whatever changes government agree on, though, it will likely be some time before payroll has to implement them. CPP legislation requires any amendments affecting contribution rates or benefits not take effect until three years after they are introduced in Parliament.
