‘Exciting time for retirement’ as CPP deal signals premium boost to 5.95%

Ottawa has reached an agreement in principle with most of the provinces to expand the Canada Pension Plan for the first time in nearly 20 years.

“It’s an exciting time for retirement. The finance minister and provinces were able to come in together to provide a national solution for Canadians,” says Jean-Philippe Provost, leader of Mercer’s retirement practice in Canada.

Only Quebec and Manitoba didn’t sign on to the agreement, although both provinces agreed to participate in ongoing discussions. Ontario has signalled it will jettison its planned Ontario Retirement Pension Plan if a finalized deal comes together.

The CPP contribution rate for both employers and employees will gradually increase to 5.95 per cent from the current 4.95 per cent. The five-year phased increase will begin on Jan. 1, 2019.

“One thing that’s made it possible is that the implementation of changes is longer than originally anticipated,” says Provost.

“If you look at the ORPP, [it] would have been fully in place by 2020. This solution gives employers in other parts of the country the five years before you reach full implementation. The fact that there’s a longer phase-in period is the reason why it’s possible to get alignment from the provinces.”

Under the deal reached yesterday in Vancouver, a worker earning $55,000 a year would see monthly premiums increase by $7 in 2019. By 2023, that would increase to $34 a month.

Read: Despite complexities, expanded CPP the right call

The expansion would also increase income replacement to one-third from one-quarter of pensionable earnings, thereby boosting the maximum CPP benefit to $17,478 from the current level of roughly $13,000.

“This means that, at maturity, a Canadian with $50,000 in constant earnings throughout their working life would receive a yearly pension benefit of around $16,000 instead of the $12,000 they would currently receive,” Finance Minister Bill Morneau said in a statement.

Morneau also said the five-year phase-in would provide more time for businesses to adjust. In addition, Ottawa will boost the federal working income tax benefit to offset the effect of higher premiums on low-income workers and will offer a tax deduction for employee contributions associated with the enhanced portion of the CPP.

The expansion will increase the maximum income subject to the CPP by 14 per cent, putting it at a projected $82,700 by 2025.

Read: 58% of Canadian favour CPP expansion: poll

After reaching the agreement, the Ontario government said it would scrap the ORPP.

“In the absence of a willing or collaborative federal partner at that time, Ontario began establishing the ORPP,” Ontario Minister of Finance Charles Sousa and Associate Minister of Finance Indira Naidoo-Harris said in a statement. “Ontario’s extensive consultations in developing the ORPP determined that to meet Ontarians’ retirement needs, CPP enhancement would have to be timely and provide a level of adequacy and coverage that reflects the design of the ORPP.”

Read: Is Illinios’ auto-enrolment savings program bette than the ORPP?

When it comes to the impact on the ORPP, Provost says expanding the CPP is the better route. “The ORPP was a good program,” he says.

“One of our concerns with the ORPP was that it was a solution for Ontarians. What’s really exciting about the decision to expand the CPP is that this becomes a national solution and, because it’s a national solution, it will significantly make life easier for employers. Because it’s a larger program, there’s going to be additional financial efficiencies, and this will translate to lower contribution for members or ultimately higher benefits for the same level of contribution for the participants. From that standpoint, an extended CPP, a national solution, makes perfect sense.”

Read: Ontario passes ORPP bill

Nevertheless, concerns about the deal remain, says Michel St-Germain, vice-chair of the Association of Canadian Pension Management’s national policy committee. St-Germain says it would be nice if the deal included Quebec but he suggests that when it comes to Manitoba, it may come on board in the future. “The feeling is that Manitoba, who hadn’t signed yesterday, with time may agree to it,” he says.

The deal is an improvement on the ORPP, St.Germain adds. “It is a plan also that is more modest than the ORPP. It provides roughly about half the benefits and at half of the cost of the ORPP, so it leaves more room to private sector to play its role.”

Ontario’s opposition Progressive Conservative party also reacted positively to yesterday’s developments. “By making the decision to co-operate with their provincial and federal partners on a national strategy, Ontario is avoiding implementation of the Ontario Retirement Pension Plan, a job-killing payroll tax that would have eroded business competitiveness, reduced the take-home pay of workers and by the government’s own estimates killed 54,000 jobs per year,” said PC pensions critic Julia Munro in a statement today.

Manitoba’s NDP opposition criticized the provincial government’s stance on the CPP, saying in a statement that it’s the best way to improve retirement incomes. “Expanding the CPP has been discussed across Canada for a long time, with ample research and with three out of four Canadians supporting its expansion,” said finance critic James Allum. “This was clearly a deliberate tactic based on ideology rather than what’s best for Manitoba families.”

Editor’s note: Comments from Allum added June 21 at 2:15 p.m.