The call for changes to the Canada Pension Plan (CPP) — including introducing higher contributions, raising the age of eligibility or both — continues to get louder. Some provincial governments and policy experts believe that the CPP is the best way to address effectively what many people believe is a looming retirement crisis.
“I think the federal government is going to have to accept some sort of increase to the contribution percentage,” says Thomas Klassen, a professor in the faculty of public policy and administration at York University in Toronto and the author of <i>Retirement in Canada</i>, a recently published book that examines how the nature of retirement is changing as the baby-boom generation ages.
The average CPP payout at age 65 is little more than $600 a month, which is too meagre, Klassen says: “There are strong arguments it should be more.”
However, the federal government has been reluctant — at least, so far — to expand the CPP. The feds are concerned that mandating higher contributions will mean increased costs to employers and less take-home pay for employees, as well as creating a drag on economic growth.
The feds have preferred trying to encourage private savings through programs such as the tax-free savings account, which has become popular with Canadians, and the pooled retirement pension plan, which, so far, has failed to gain much traction.
The uncertainty over what, if any, changes will be made to the CPP — and when they would become effective — is, in turn, introducing uncertainty into retirement planning for individuals, in which any changes to the CPP must be considered.
“Things wouldn’t change too much for people retiring in the next five or 10 years,” Klassen says. “But for people who are retiring in 10 or more years, retirement planning becomes more complex.”
Most policy experts say that Canadians aren’t saving enough for retirement. And, due to factors such as longer average lifespans, the decline of workplace pensions and a lingering low-interest rate environment, many middle-class Canadians will find themselves with lower than anticipated income in retirement.
“The middle class is in anxiety that they may drop out of the middle class,” says Amin Mawani, associate professor of taxation with the Schulich School of Business at York University.
Governments everywhere have noticed the problem and have been looking for effective solutions.
In Canada’s 2012 federal budget, the government announced that it would be increasing the eligibility age for both the old-age security (OAS) and the guaranteed income supplement (GIS) to 67 from 65 by 2023. Canadians now also are able to defer receiving OAS until age 70 in exchange for higher payouts.
As a result, some people are calling for the age of eligibility for full CPP benefits to be raised to 67 from 65 to match the changes made to the OAS and GIS. Right now, individuals can choose to receive CPP payments as early as 60 at reduced amounts or as late as 70 at greater payouts.
Raising the age of eligibility would reflect current rates of life expectancies better and the new realities of working to older ages. Whereas Canadians once might have spent roughly their first 20 years in school, their next 40 years working and their last 10 in retirement, today it’s more like 30 years in school, the next 30 working and the final 30 in retirement.
“The middle part — the working years — are getting compressed,” Mawani says.
Raising the age of eligibility for the CPP also would force Canadians to save more for retirement without changing the contribution rate, because individuals will be paying into the program for a longer period of time and drawing out of it for a shorter period.
“You are increasing contributions and payout,” Klassen explains, “without asking people to pay more as a percentage.”
Several provincial governments have been calling on the federal government to expand the CPP program. This includes Ontario’s government, which has said that it’s considering introducing a provincial public pension program if the feds won’t budge.
In September, Wes Sheridan, Prince Edward Island’s finance minister, put forward a proposal for an expanded CPP that would double the maximum insurable earnings to $102,200 from $51,100.
Sheridan’s proposal would feature two tiers of contribution rates: a lower one for the first $25,600 of insurable earnings, plus a higher one for above that threshold. The tiers would allow for two rates of annual CPP benefits payout: 25% on the first $25,600 of income and 40% on income above that amount (to the $102,200 maximum).
Sheridan’s proposal has become a focal point for debate on what an expanded CPP might look like. The two-tier contribution and payout rates appear to address the issue of adequate pensions for middle-income Canadians without imposing higher contribution rates on lower-income Canadians or endangering their eventual eligibility for OAS and GIS benefits.
Provincial finance ministers will be meeting with federal Finance Minister Jim Flaherty in December. Proponents of an expanded CPP are hoping that a more concrete plan will be on the agenda at that meeting.
Even if an agreement were to be reached, making any changes won’t be easy. Amending the CPP program would require the approval of two-thirds of the provinces that represent two-thirds of Canada’s population. IE