To expand or not to expand? That is the question.

The debate about whether to increase the size of the Canada Pension Plan (CPP) benefits through higher contributions is heating up as the country awaits an important meeting of the finance ministers where the issue will be on the agenda. While some say an expanded CPP will provide retirement security for all Canadians, others argue that it will end up subsidizing people who don’t need help.

Subsidy for the rich
Increasing the size of CPP benefits would end up helping higher-income couples that don’t need the subsidy, according to Jack Mintz, professor at the School of Public Policy at the University of Calgary.

Currently, the average monthly CPP benefit is about $500-$600, with the maximum going up to $1,000. CPP benefits replace a quarter of annual earnings up to about $50,000. Contributions amount to 9.9% of earnings (split in half between the employer and the employee) or a maximum of about $4,600 a year.

So, Mintz says, if Canada expands the replacement rate to capture incomes up to $104,000 per individual—which is a proposal put forth by the government of Prince Edward Island—then married couples would receive over $200,000 in CPP income. The government shouldn’t be in the business of guaranteeing replacement income for families with above-average earnings, Mintz argues.

Under P.E.I.’s proposal, the replacement rate of CPP benefits would increase from the current 25% to 40% for incomes between $26,000 and $52,000 and a new replacement rate of 15% would be implemented for incomes between $52,000 and $104,000. These changes would be introduced within three years.

“You need potentially a more targeted approach,” Mintz explains. “We haven’t won the war on elderly poverty and CPP [expansion] doesn’t address that issue very well.” Mintz says he used to be a supporter of a modest CPP expansion before he came across the issue of elderly poverty.

“The poverty rate among single elderly women is surprisingly high,” Mintz says, noting that it’s 20% in Canada. “That’s problematic.”

A new OECD study shows that old-age poverty rates here are among the 10 lowest observed in OECD countries—only 7.2% of people over 65 eke out an existence in Canada, compared to an OECD average of 12.8%.

However, while old-age poverty declined in many developed countries between 2007 and 2010, poverty among Canada’s seniors increased during that period by about two percentage points, according to the OECD’s Pensions at a Glance 2013 report.

The study notes that elderly women who are divorced or separated were the ones particularly likely to experience poverty. “Higher poverty among older women reflects lower wages, more part-time work and career gaps during women’s working lives, as well as the effect of longer female life expectancy, for which many women have not been able to save enough,” according to the report.

Apart from failing to offer a fine-grained solution to Canada’s retirement income inequality, expanding the CPP would also limit people’s ability to invest in other important things, such as buying a house, making mortgage payments and contributing to an RRSP, explains Mintz.

Cup-of-coffee-a-day solution

“That’s a phony argument,” says Hassan Yussuff, secretary-treasurer at the Canadian Labour Congress (CLC). Most Canadians spend more on coffee every day than what they’d pay for a CPP expansion, Yussuff adds.

There are various proposals on the table about how much exactly to expand the CPP.

The CLC’s proposal, for instance, is more ambitious than PEI’s. It calls for doubling CPP benefits over the span of seven years. This would be achieved by increasing what employees now save through their CPP contributions by 0.43% of pensionable earnings each year. “For a worker earning $47,200 or more per year, the initial cost of gradually doubling future CPP benefits works out to about nine cents an hour, or $3.57 a week,” according to the CLC’s website.

“It will cost Canadians less than a dollar a day—less than a cup of coffee a day,” says Yussuff.

Under the CLC’s proposal, the average earnings replaced by the CPP benefits would essentially double, amounting to a maximum of $1,868 a month (in current dollars).

“The CPP is the one universal saving pension plan that we have in the country—92% of Canadians are covered by it,” Yussuff says, explaining that this is the reason why it makes more sense to bulk it up, rather than focusing on other means of securing a retirement income.

The CPP is the only source of retirement income for millions of Canadians.

It is estimated that nearly two in five future retirees here have no company pension plan. Overall, barely a third of Canadians participate in a DB pension plan, 18% are in a DC plan, and only 15% are in a group RRSP, according to a recent BlackRock survey.

At the same time, Canada’s lifespans are increasing. In 1950, a 35-year-old Canadian had a remaining life expectancy of 38.6 years, but in 2010, this jumped to 46.8 years, according to the C.D. Howe Institute.

The solution to this worrisome trend is to increase CPP benefits, Yussuff argues, adding that other than the small size of current payments, the CPP is a great program with a number of advantages.

“It’s payroll deductible. Employers and employees contribute equally. It’s indexed to inflation. You can’t withdraw the money. You can’t stop contributing,” Yussuff said. “It’s pan-Canadian. It costs very little to administer.”

What’s next?

But changing the size of CPP benefits is not easy. It requires the approval of at least seven provinces—and those seven provinces, combined, need to represent two-thirds of the country’s population.

At a meeting in December, finance minister Jim Flaherty will discuss the issue with provincial and territorial finance ministers.

For his part, Flaherty says an expanded CPP makes sense, but not right now. Speaking recently to reporters in Toronto, he said: “I can see it being good in the long run for Canadians, at the right time. But I would want to see significantly more economic growth than we have now before we imposed an additional burden on Canadian employers and employees.”

But, according to Yussuff, Canada cannot afford to wait. “If we don’t do something soon, there’s a huge crisis coming,” he warns.

Copyright © 2020 Transcontinental Media G.P. Originally published on

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If I’m going to need to put more money away for retirement, I want my heirs to benefit from the surplus after I pass – even if I do not have a surviving spouse or dependent children.

Friday, November 29 at 3:45 pm | Reply

JP Laporte:

Canadians are missing a huge chunk of the debate around pension coverage and the need to expand the CPP.

Right now, the media has focussed on the voluntary PRPP option favoured by the federal government and the CFIB, and the NDP/CLC push for a mandatory expansion of the current CPP.

Completely missing from the debate is the original idea first introduced in 2004 (before the 2008 market meltdown and the various provincial pension reform commissions) of a voluntary Supplemental Canada Pension Plan. The idea was formulated by the federal Liberal Party in its 2011 election platform as the Secured Growth Option.

The Liberal version borrows the best from both policies: it uses the economies of scale, professional management and universality of the CPP, while being voluntary and therefore respectful of the small private sector (the CFIB constituency) and competes with existing private sector offerings (therefore pro-competition).

It is unfortunate that both extremes of the political spectrum have dismissed it without letting Canadians make their own determination as to whether it makes more sense to them.

Monday, December 02 at 11:00 am | Reply

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