What you need to know about CPP reform

Finance ministers to meet in Ottawa on the topic this week

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Canada’s finance ministers meet in Ottawa on Sunday and Monday with a full agenda of federal-provincial issues to consider, ranging from infrastructure to equalization and health transfers to the new Canada Child Benefit. But the largest dollar item on the agenda is reform to the Canada Pension Plan. Two years ago, talk of CPP reform ended abruptly when the Conservative federal government declared it had no interest. But, with new parties in power in Ottawa and several provincial capitals, there is new momentum behind CPP reform. To set the stage, let’s look at the why, what and the who of CPP reform.

Why does the CPP need reform?

Evidence suggests that most Canadians have sufficient retirement income to keep their working-age standard of living intact through the retirement years. However, there is a substantial minority that is struggling. Among middle-earners who do not have a workplace pension plan, about half don’t achieve sufficient levels of incomes to provide a comfortable retirement.

Savings solutions that rely on voluntary participation are unlikely to help much. With RRSPs, TFSAs, and numerous other savings opportunities already available, adding one more voluntary option won’t help those who find it hard to save. A mandatory pension expansion, therefore, can help all Canadians prepare for their own retirements—and decrease the need for other taxpayers to subsidize the pensions of non-savers through the existing support programs for low-income seniors.

What will CPP reform focus on?

There are three main elements to look for in an expansion of the CPP.

First is the income range covered. In 2016, earnings between $3,500 and $54,900 are covered by the CPP. Most options for reform envision moving the upper limit higher in order to cover more middle-earners. As a point of comparison, Social Security in the U.S. covers a range up to US$118,500.

The second point of debate is the replacement rate on covered income. The target under the current CPP is 25 per cent, meaning that the CPP aims to pay an amount equal to about 25 per cent of covered earnings. Some proposals try to increase this replacement rate higher than 25 per cent for everyone, while others offer different rates at different bands of income.

The third item for discussion is what to do with those covered by existing workplace pension plans. In past CPP expansions, existing workplace plans often shrunk themselves to accommodate the larger CPP so that people didn’t end up with double-coverage. However, an alternative approach is to exempt those with workplace plans from the expansion. Figuring out which approach to take—and how to define a comparable workplace plan—will be pivotal to the discussions.

Who needs to agree to the reform?

Under the Canada Pension Plan Act, amendments to the CPP require the agreement of the federal government along with seven provinces comprising two-thirds of the Canadian population. Given that double constraint, how are the prospects for amendments being passed?

To start, the Liberal government in Ottawa included CPP reform in its platform, so the federal government shouldn’t be a problem.

The provinces of British Columbia and Saskatchewan have spoken explicitly against reform in recent months, so they’re likely out. Quebec also expressed some concerns, taking the potential “against” count up to three. If every other province agreed to reform, we would reach the required seven provinces agreeing. However, B.C., Saskatchewan, and Quebec have populations that exceed one-third of the 10-province total, so those three provinces alone could block reform on the population side of the amendment formula.

If Quebec were brought on board, blocking an amendment would require two of the remaining seven provinces—and that is less likely. So, as of right now, Quebec seems to be the pivotal vote. Ironically, Quebec runs its own parallel Quebec Pension Plan so would not necessarily be bound by any CPP reform. In practice, though, the QPP and CPP have evolved very similarly.

Whatever comes of the CPP discussions, the legislation mandates a three-year wait before any reform goes into effect. Moreover, most reforms being contemplated will only affect retirement incomes decades from now when today’s contributors hit retirement ages. So, the exercise the finance ministers begin on Sunday is one of long-run economic policy. The ministers may not reach agreement in their first round of renewed CPP talks, but it is worth taking the time to get it right.

This article originally appeared on macleans.ca.

5 comments on “What you need to know about CPP reform

  1. So what is Ontario’s stance on this? Wynne was promoting an Ontario Registered Pension Plan prior to the election. She stated she might shelve it if the Liberals won and reformed CPP. What’s her plan now? TV ads for ORPP have stopped airing.

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  2. Why is it,that stay at home moms get very little cpp.as they contributed to the well being of Canada as much if not more than woman that worked outside the home.

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    • @ Frank Donahue.
      That is a misconception. The CPP has a “child-rearing provision” that was created in 1966 that recognizes mothers or fathers (whoever principle care giver is) contribution and allows the child-rearing period to be excluded from the contributory period when calculating their CPP benefit amount, ensuring that they get the highest possible payment. This provision is good until the child reaches 7 years of age. If you have two children and they are 3 years apart, that means you have 10 years that will be taken off in the CPP formula which will increase the CPP payout when you retire.

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  3. One reform that needs to be looked at is CPP contributions for self employed people. Self employed income can vary dramatically from year to year providing maximum contributions from income way over the yearly cap one year then much lower the next year resulting in much less than max contributions. I would be happy to contribute based on some type of averaging formula that smoothed out the peaks and valleys.

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  4. I’m sure the devil will be in the details.
    Let’s hope this won’t turn into a veiled redistribution program or follow Greece’s path. CPP should remain “assistance” to peoples own savings. I fear people are expecting some kind of golden plan here. People generally dot understand the implications of that long term. They just want to hear promises they like rather then realities. Lets hopethe group that organizes this does it for good rather then future votes.

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