A version of this commentary appeared in the Globe and Mail, Saskatoon Star Phoenix and Forever Young
In mid-September, the Minister of Finance for Prince Edward Island spoke to the Atlantic Provinces Economic Council (APEC) in Charlottetown. In his speech, he outlined the need for expansion of the Canada Pension Plan (CPP) and then described in some detail his idea for a “wedged” CPP expansion. This is not entirely new as the idea arises from work done by Professor Michael Wolfson of the University of Ottawa (and previously of Statistics Canada). So the ideas have academic foundations — and now, new found political support.
There are two serious issues that have held up any proposals to date for CPP expansion. First, it is difficult to mandate poor workers to contribute extra money to the CPP when any extra benefits would just be lost to claw backs in their Guaranteed Income Supplement (GIS) benefits. In fact, given that there are several provincial income supplement plans, the loss of benefits could be a full dollar for every extra dollar of CPP benefit earned. So the lowest income earners would be forced to pay in money they really don’t have to buy zero new net benefits. Not such a good deal.
The second important stumbling block is the fact that many research papers have found that the workers truly in need in the next generation of retirees are those who earn between 50% of the average wage and 200% of the average wage — in today’s dollar amounts, between $25,000 and $100,000. Those below $25,000 do fairly well through combined Old Age Security (OAS), GIS and CPP benefits. Those earning over $100,000 appear to be able to take care of themselves with the tax incented vehicles now available.
That is why PEI is proposing a new wedge benefit. Here is how it would work.
First, any new tier of benefits would be fully funded. That is, each generation of workers would pay in full for their own benefits. There would be no inter-generational transfers.
Today, the CPP provides an inflation protected defined benefit that replaces 25% of earnings up to approximately $50,000. Contributions are 9.9% of earnings or a maximum of about $4600 (but split 50/50 with one’s employer). Currently the maximum annual CPP benefit is about $1000 a month or $12,000 a year. The average payment is about half of this or $500 per month.
The proposal would expand the CPP starting at earnings of $25,000. No new contributions or benefits would exist for those earning $25,000 a year or less. They would continue to depend on their OAS/GIS/CPP. Pensionable earnings would be expanded up to $100,000 and there would be a new tier of benefits equal to 15% of pensionable earnings for a total 40% benefit.
This could be paid for with new contributions of about 3.1% (shared 50/50 with one’s employer — so 1.55% each) starting at $25,000.
Assuming a 40-year career, for someone earning $40,000 their contributions would increase by a total of $465 a year (split 50/50). This would bring an estimated increase in CPP benefits of $2250 per year.
Someone earning $75,000, would pay extra contributions of $1550 (split 50/50) and would see a $7500 rise in pension benefits annually. The maximum increase in benefits would be $11,250 — almost double the current maximum benefit under the existing plan.
The PEI proposal states that these changes would be phased in over a relatively short period of time (two to three years). Further, Minister Sheridan argues that the new contributions are not taxes because they are buying real benefits.
It is not easy to amend the CPP. It requires the approval of 2/3rds of the provinces with 2/3rds of the population of Canada (including Quebec). That is why previous reform proposals have failed.
The PEI proposal now has the public backing of the Province of Ontario. Other provinces and the federal government are taking more cautionary stances worrying about new workplace costs in a shaky economy.
Clearly, this proposal is carefully thought out and deserves serious consideration. It is hoped that it will receive the very wide public review — and government consideration — it deserves.
Robert Brown is an expert advisor with EvidenceNetwork.ca and a Fellow with the Canadian Institute of Actuaries. He was Professor of Actuarial Science at the University of Waterloo for 39 years and a past president of the Canadian Institute of Actuaries.