Business groups call CPP enhancements a job killer, warn of further damage to shaky economy

Business organizations reacted quickly and harshly Tuesday to freshly announced enhancements to the Canada Pension Plan that will increase contributions employers must make.

The Canadian Federation of Independent Business said the plan, which was endorsed by eight of 10 provincial finance ministers late Monday, is “a devastating move for Canadian workers” and for the economy.

The phase-in of the improvements to the national pension scheme over a seven-year period starting in 2019 did little to assuage predictions of wage freezes and stalled investments.

“It is tremendously disappointing to see that finance ministers are putting Canadian wages, hours and jobs in jeopardy and willfully moving to make an already shaky economy even worse,” said Dan Kelly, president of the CFIB, which represents small and medium-sized businesses.

“It appears that jobs and the economy are not particularly high priorities for the governments [aside from Quebec and Manitoba] that have signed off on this deal,” he said.

The agreement-in-principle, which only Quebec and Manitoba neglected to endorse, will see an increase in monthly premiums phased-in starting at $7 a month in 2019 for a typical worker earning about $55,000.

By 2023, an extra $34 a month in pension premiums will mean up to $4,300 more in annual payouts come retirement time for the average Canadian wage earner.

The plan will raise contributions to boost the percentage of income covered by CPP benefits to 33 per cent from 25 per cent. The cap on income covered is also to be boosted to $82,700 from $54,900.

Perrin Beatty, chief executive of the Canadian Chamber of Commerce, warned of “a big bill coming” to cover the costs of these enhancements, though the government has not yet specified how much the improvements will cost employers and employees, who split the cost of current contributions to CPP.

“When a government promises big increases in benefits without telling us how much it will cost or who will pay for it, we know there’s a big bill coming,” Beatty said in a statement, adding that employers may halt job creation or delay investments to help pay for the additional CPP costs.

“Although there’s never a right time for a payroll tax, the fragile state of our economy makes this a particularly bad time,” Beatty said.

Andrew Harrison, a partner and pension specialist at law firm Borden Ladner Gervais LLP, said the planned enhancements are likely to influence business decisions over the next decade.

“I anticipate that businesses will factor the increased contributions into their pay increases between now and 2025,” he said.

A report from TD Economics on Tuesday suggested both employers and employees will be subject to a percentage point increase in the 4.95 per cent contributions they make to CPP now.

Economist Brian DePratto calculates that a worker making $90,000 this year would see a 47 per cent increase in the percentage of gross earnings paid into CPP by the final year of the implementation in 2025.

He said the worker would be paying roughly 4.2 per cent of their gross earnings into CPP by the seventh year of the phase-in, compared to 2.8 per cent in 2016, but the annual salary is likely to have increased to $113,000 by then.

The increase in contributions for employers is likely to be the same as for employees, DePratto said, but scaling the actual impact in 2025 for businesses is more difficult because revenue and employment figures tend to be more volatile than wages, which rise in line with historic trends.

Jeff Kissack, a consulting actuary at Willis Towers Watson, said he expects employers that provide workers with private pension plans to take a hard look at the benefits they offer, with an eye to possibly reducing them to account for the universal enhancements to the Canada Pension Plan.

“Some employers might cut back on the existing pension plan,” he said, adding that there is likely to be some interesting bargaining in the days ahead at companies where private pension plan terms are negotiated through collective agreements.

“This will make negotiations interesting and somewhat challenging, I think,” he said.

Kissack said businesses in Ontario could be more at ease with the broad CPP enhancements than they would have been if Ontario had gone ahead with a backup plan to create a separate pension plan to augment retirement benefits for workers in that province.

The universal CPP expansion, which will affect all Canadian business, won’t put Ontario businesses “at a competitive disadvantage,” he said.

Surveys conducted by the CFIB in the lead-up to the CPP overhaul suggested more than 70 per cent of small business owners across Canada were opposed to a mandatory CPP premium hike, while 67 per cent said it would increase pressure to freeze or cut salaries.

More than a third of businesses surveyed by the industry group say increased CPP premiums would force them to lay off employees.

Other critics of the CPP expansion plan include the Montreal Economic Institute, which said the improvements would come at a cost: disposable income for workers.

This is expected to lead to less voluntary savings, according to Youri Chassin, research director at the MEI, an independent research organization.

“Those who have difficulty saving, or who barely manage to make ends meet, will find themselves in an even more precarious situation,” he said.

The Fraser Institute reached a similar conclusion, based on research into what happened when CPP premiums were raised in the 1990s.

“There’s not going to be an actual increase in savings — it’s going to be a reshuffling,” predicted Charles Lammam, director of fiscal studies at the think-tank.

The Toronto Financial Services Alliance and some seniors groups welcomed the plan to expand CPP, though the TFSA said it would have preferred “a more targeted approach” to closing gaps in Canada’s retirement savings.

Tony Hooper, Co-Chair of the Pension Committee of FEI Canada’s Policy Forum, said the association for senior financial executives is pleased the government opted for “a phased-in” implementation.

“It was wise to back off the Ontario go-it-alone approach,” he said, acknowledging that the provincial proposal may have kick-started the more universal overhaul.

“The federal proposal would provide a lower payout than the ORPP [pension proposed in Ontario], but will be portable, universal and tax-deductible,” Hooper said.

Financial Post with files from the Canadian Press

bshecter@nationalpost.com

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