VANCOUVER — Finance Minister Bill Morneau met his provincial and territorial counterparts in Vancouver on Monday and reached an agreement with most of them to expand the Canada Pension Plan. Here is what you need to know about CPP and the proposed deal:
1) The system is designed so that each generation of workers pays for its own retirement. That makes it different from two other income replacement programs for seniors and retirees: old age security (OAS) and the guaranteed income supplement (GIS). Those measures are covered through general tax revenues, meaning that workers today pay taxes to raise the incomes of poorer seniors.
2) CPP premiums have only been raised once in the last 20 years. In 1997, finance ministers agreed to a phased-in increase in premiums to ensure one generation of workers wasn’t paying for another generation’s retirement. The argument today is that the CPP should pay more in benefits and help those who aren’t saving enough for retirement. The argument against raising premiums is that it would hit workers’ wallets at a time when governments keep saying the economy is fragile.
3) Crunching the numbers
Increasing the income replacement rate to one-third from one-quarter, meaning the maximum CPP benefit will be about $17,478 instead of about $13,000.
— Increasing premiums on employers and employees by one per cent, meaning an extra $408 a year coming off paycheques.
— Increased premiums will be phased in over seven years, starting in 2019.
— Increasing by 14 per cent to $82,700 the maximum amount of income subject to CPP.
— Expanding the refundable tax credit known as the federal working income tax benefit, to help low-income Canadians offset the increase in premiums.
4) Not every province has to have the CPP. Quebec has its own version. Saskatchewan has its own pension plan, but the payments are voluntary, acting more like a RRSP. Along with Quebec, Manitoba didn’t sign onto the deal on Monday.
5) Ontario had planned to launch its own pension plan if changes weren’t made to CPP, but with Monday’s agreement-in-principle Canada’s most populous province said it will back away.
6) Small business owners are against it. Mandatory matching contributions will also mean a jump in payroll expenses for employers, which the Canadian Federation of Independent Business condemned Tuesday as “a devastating move for Canadian workers and the economy in general.”
The CFIB says 71 per cent of small business owners oppose a mandatory premium hike
67 say it would increase pressure to freeze or cut salaries
46 per cent say they would reduce investment in their business
35 per cent say it would force them to lay off employees
And from BMO chief economist Douglas Porter:
As Ottawa notes, someone at the $55,000 income level will see their premiums rise by just $7/month in 2019. But, keep in mind that will increase to $34/month by 2023 when the contribution rate increase is fully implemented, while those with higher incomes will see premiums rise quite a bit more when the coverage level expands between 2023 and 2025. One immediate impact of this change is that Ontario’s proposed pension plan is now effectively scraped, so we finally have some clarity on that front.