CPP Changes: Don’t Pop The Champagne
Posted July 8, 2016
The proposed changes to the Canada Pension Plan (CPP) were agreed to on June 20th by the federal government and all the provinces except Manitoba and Quebec. They are mildly useful, and will have some unexpected consequences.
The CPP is one element in a three part public system of retirement income programs. The second part is Old Age Security (OAS), for which everyone is eligible starting at age 65, although it all gets taxed back for higher earners. Thirdly, the Guaranteed Income Supplement (GIS) provides additional pensions for low income earners.
Pension plans are complicated. Nevertheless, the news release announcing the biggest change since the plan was established in 1965 contained fewer than 550 words. There are lots of details to be filled in later.
The broad outlines are clear. The pension will increase from 25% to 33% of eligible earnings, and the eligible earnings will increase by 14%. The first will increase the maximum benefit from roughly $12,000 to $16,000; the second will add another $2,000 (for the purpose of this article, all numbers are in 2016 dollars. In practice, both contributions and benefits will grow with inflation and other factors).
Contributions will increase by 1% of earnings up to the existing benefit maximum, and 4% on the increase in the maximum.
The program will be gradually phased in starting at the beginning of 2019, and it will take 40 or more years to earn the maximum benefits. It is perhaps not coincidental that all of the participating governments except Saskatchewan will have their next election before taxpayers notice another dip in their take-home pay.
The impact of all this will be far from uniform.
John is a low income earner who will be eligible for GIS when he retires. Paying for a bigger CPP benefit is bad news for him because it will offset what he would have received from GIS. The government says it will address this problem with an enhanced federal Working Income Tax Benefit. John is likely to find all this pretty confusing.
Sarah is a 40 year old executive making $200,000. When she reaches 65, she will have 20 years’ credit on the plan enhancements so they will be worth only about $3,000 per year, less than half that after tax.
Jason is 25, making $55,000 per year. If he works til age 65, his combined CPP and OAS will be about $24,300. That is 44% of his pre-retirement income, useful but certainly not enough to maintain his lifestyle. His twin brother Kyle makes $120,000 per year. All of his OAS will be taxed back so even with an expanded CPP his combined public sector pension will be $20,000, less than Jason.
Mary is a school teacher who will reach age 65 in 2020. She will get no discernible benefit from the new program. Her sister Susan, also a teacher, will reach 65 in 2030, and will barely notice the extra CPP she is receiving from the plan changes.
Susan’s 25 year old daughter Brittany is also a teacher. Most of her benefit increase will be offset by a decrease in her pension from the Teachers’ Pension Plan (TPP).
All three teachers will be paying an additional 2.4% of payroll on the 14% increase in CPP maximum (their TPP contributions are 1.6% lower on earnings up to the CPP maximum).
These three will, to an even greater extent than before, be subsidizing inflation indexing for those who retired before Aug. 1st 2006, a benefit that Mary, Susan, and Brittany are unlikely to ever receive.
The claim that Canadians have a serious shortfall in their retirement savings is exaggerated. If there is a real problem, these modest changes are certainly not going to solve it.
Likewise, the frenzied hand-wringing by Conservative finance critic Lisa Raitt (higher contribution rates “will have a devastating effect on hard-working middle-class families”) seems rather overdone.
The CPP is a cost-effective way provide retirement benefits. It is nice to see the federal and provincial governments (well, most of them) finding some improvements they can agree on.
The changes are directionally correct but modest in scope. Taxpayers should not think that they can now cash in their RRSPs and use them for a vacation or a new Harley.
Related ArticlesPensions in Crisis
- A Weak Response to the Teachers’ Pensions Plan Deficit June 20, 2014
- Fix the Teacher’s Pension Plan Now May 16, 2014
- Flaherty: Wait Till Next Year February 14, 2014
Voters trying to understand the various positions being advocated for the Canada Pension Plan have every reason to be confused.