Though Canada’s retirement income system was ranked eighth among 27 countries by the 2016 Melbourne Mercer Global Index, it also revealed the weaknesses in our retirement system.
These weaknesses include that: three in four private sector workers don’t have access to an employer-sponsored pension plan; the level of household savings for middle-income earners is insufficient; and younger workers often find themselves disadvantaged by pension plan changes. Further increases in life expectancies and a sustained environment of low investment returns could jeopardize what we’ve achieved.
The provinces and the federal government agreed this year to expand the Canada Pension Plan. In the interest of adopting a national solution, Ontario agreed to sign on to the enhanced CPP rather than stick to the Ontario Retirement Pension Plan it had initially announced. Quebec, however, has yet to decide on an approach.
Have your say: Do the Quebec Pension Plan proposals hit the mark?
The goal of the CPP enhancement is to provide a 33 per cent replacement rate on the first $62,500 of earnings (in 2016 dollars). A portion of this 33 per cent will continue to be provided by the current plan. The remainder will come from the new plan, which has been carefully designed to allow for its long-term sustainability. It’s national in scope, mandatory, modest, fully funded, has variable benefits and its taxation is comparable to registered retirement savings plans.
If there’s a flaw with the new plan it’s that it targets Canadians of modest income in addition to middle-income earners, while the existing programs already offer sufficient coverage for modest income earners.
It’s also important to keep in mind that building the new plan on top of an existing program will allow for significant economies of scale with respect to administration fees. However, not all workers have the same savings needs and a modest increase, as is the case here, allows flexibility for individuals who need to save more.
Why would Quebec reject this expansion?
QPP contributions are currently higher than CPP contributions, at 10.80 per cent of earnings up to $55,000 compared to the CPP’s 9.90 per cent. Some say the QPP expansion should be more modest in order to bring contributions closer to CPP levels. Many also feel Quebec doesn’t have the means to further increase payroll taxes.
Read: Quebec unions call proposed QPP reform far weaker than CPP changes
To reduce the gap in payroll taxes, Quebec should first adjust the existing plan to make it less costly. Thought should be given to gradually increasing the normal retirement age from age 65 to 67. Furthermore, to avoid intergenerational transfers, experience losses should be shared with benefit recipients — for example, by reducing or delaying indexation — and not simply always asking active workers and employers to contribute more.
Let’s move forward
The QPP was established in 1966 and has served our current retirees well. Fifty years later, it’s time to position the plan for the future. In December 2016, the Quebec government published its consultation paper on the QPP’s future. Let’s review the three options on the table.
- The first scenario, the status quo, should not be a real option. The QPP needs to be modernized to meet the needs of the new generation of workers.
- The second scenario is the option developed by the Quebec government. It’s similar to the CPP solution, except that the first $27,500 in earnings (in 2016 dollars) wouldn’t be covered. In practical terms, that means the plan’s enhancement would be 50 per cent less generous than the CPP for a worker earning $55,000 (in 2016 dollars). While less expensive, the enhancement provided would be too modest. Having a different solution in Quebec would also make the situation very complex for national employers that operate in many provinces, including Quebec. In addition, we feel this design isn’t well suited to the workforce of tomorrow, which will be more mobile and composed of more independent workers.
- The third scenario is the possibility of Quebec adopting the same parameters as the new CPP. The advantages of adopting a program similar to the rest of Canada outweigh the fact that the cost of the QPP is a little more overall. If we want to bring the level of payroll taxes in line with the other provinces, cost control measures could be added to the current QPP and other payroll taxes could also be reduced, such as those for funding health-care benefits.
Read: QPP reform must target middle-income earners: ACPM
Expansion of the QPP is necessary for the future of our retirement system. During the parliamentary committee’s public consultation in mid-January, there was an elephant in the room. Canada has adopted the new CPP and that can’t be ignored. It’s now Quebec’s turn to compromise.
Jean-Philippe Provost is a senior partner and wealth business leader at Mercer Canada. Hubert Tremblay is a principal at Mercer Canada.