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Expanding CPP easier said than done
A version of this commentary appeared in the Winnipeg Free Press, Huffington Post and the New Brunswick Telegraph-Journal Had I suggested just 15 years ago that we should expand the Canada Pension Plan to provide larger benef its on a broader range of wages, I would have been laughed out of town. Prior to 1998, the CPP was seen as leaning against death’s door. Young Canadians were told to expect no benef its f rom the CPP when they retired. But because of the signif icant ref orms of 1998, CPP is now healthy f or as f ar as the eye cannot see (the same is not true f or the QPP, but that’s another story). It is so healthy, in f act, that many observers are suggesting it should be expanded to provide larger benef its. T his could be done in two ways (or a combination thereof ). Currently Canadians contribute 9.9 per cent of wages (split between the worker and the employer) to the CPP. In 2001, the rate applied to wages over $3,500 and up to $48,300 — the “year’s maximum pensionable earnings.” Benef its accrue at the rate of 25 per cent of the adjusted (indexed to the average wage) average of recorded employment earnings over roughly a 40-year period of time. So, one way to expand the CPP would be to raise the 25 per cent benef it rate. Another would be to raise the year’s maximum pensionable earnings (the YMPE). Or both. Sounds pretty straightf orward. But it isn’t. Prior to 1996, the contributions Canadians made to the CPP were not large enough to cover the benef its being accrued. In f act, out of today’s 9.9 per cent contribution rate, a f ull f our per cent goes to covering past legacy costs (the previous unf unded liability). T hus, it would be possible, if we started a f ully f unded CPP today, to do so at a contribution rate of about 5.9 per cent. If , however, we wish to expand the 25 per cent benef it rate only f or retirement benef its, and we do not increase any of the ancillary benef its (orphan’s, disability, death, etc.) we could f und a new benef it tier with a contribution rate of no more than f ive per cent of benef it accruals. T his sounds good at f irst glance, but, in f act, it creates a series of complications. For example, let’s say we wish to move f rom a 25 per cent benef it rate to 50 per cent. T his would require a 14.9 per cent contribution up to the YMPE. Double the benef its f or 50 per cent more cost. Sounds good. But think about poorer workers. Having paid a 14.9 per cent contribution rate over 40 years, they will now receive a 50 per cent CPP benef it when they retire. But this is immediately deducted f rom their guaranteed income supplement at a clawback rate of 50 per cent and, depending on their province of residency, they
could lose another 50 per cent f rom their provincial benef its (e.g., Ontario Gains) f or a total 100 per cent clawback. T hat means a 50 per cent increase in contributions but no net gain in disposable income f rom government sources. How many workers would vote f or that? To avoid the impact of the GIS clawback, we could exempt a portion of employment earnings (say up to $30,000 a year) f rom contributions and benef it accrual. Or, maybe we should leave the benef it ratio at 25 per cent but increase the YMPE. Again, the value of the ancillary benef its is important to this analysis. If , as assumed above, we don’t increase ancillary benef its at all, and accepting the current CPP f unding f ormula, then the required contributions would be 9.9 per cent up to the YMPE and f ive per cent above it. Again, what politician would want to try to win votes with a new system in which poorer workers have a 9.9 per cent contribution rate f or their f irst tier benef its and higher-income workers only pay f ive per cent f or their second tier of benef its? A hard sell. Finally, under any proposal that uses an expanded CPP, the new benef its will not be f ully available f or 40 years. Until then, only a f raction would accrue. At the end of the day, it takes at least seven provinces with at least two-thirds of the Canadian population to amend the CPP. T his includes Quebec. T his is not an easy task, as can be seen today. To date, the provinces have not seen a proposal f or an increased CPP that meets with their approval. Once one understands the issues more f ully, one can see why. Rob Brown was Professor of Actuarial Science at the University of Waterloo for 39 years and a past President of the Canadian Institute of Actuaries. He is also an expert advisor with EvidenceNetwork.ca.