Canada Pension Plan: The New Deal
July 1 and all things Canadian typically are celebrated through this country’s unique music and culture. But we rarely reflect upon the important role in our lives of major social programs.
This year especially, the Canada Pension Plan should be recognized as a significant national achievement. It was no mean feat to craft a complex political agreement that has translated into one of the most sophisticated and financially successful pension programs in the world. 2016 marks the 50th year of the introduction of this landmark achievement. But we should celebrate not only the special birthday of this vital program. This Canada Day, we also need to recognize the new political agreement to renew and revitalize the Canada Pension Plan for future generations.
It is by no means a perfect agreement and there are many unanswered questions. But the June 20 announcement of an agreement in principle to a CPP deal is a big deal – from several perspectives. It renewed federal leadership as steward of this vital social program, it brought on side sufficient provincial support and will redress one of the major shortcomings of the retirement income system.
When the Canada and Québec Pension Plans were created in the mid-1960s, they were designed to pay modest benefits. The maximum amount is only one-quarter of average earnings, which in 2016 means a maximum annual CPP retirement payment of $13,110. The private tier of employer-sponsored pension plans and individual savings plans was expected to play the lion’s share of the earnings replacement objective for middle- and upper-income Canadians. Unfortunately, that did not happen.
The new federal-provincial agreement will see the CPP replacement level gradually increase from the current one-quarter of eligible earnings to one-third of these earnings from 2018 to 2023. The changes that comprise the new deal will be phased in over seven years, from 2019 to 2025, to help minimize the impact of rising contributions upon both employers and employees.
Of course, Caledon’s interest lies in securing the current and future well-being of workers. The pressure of increased payroll contributions upon the take-home pay of low-wage employees is a major concern. The federal government addressed this problem through its promise to boost the Working Income Tax Benefit (WITB), an earnings supplement intended for low-wage workers. For years, Caledon has called for an increase to the WITB. But details of the promised changes are as yet unknown. We also propose changes to the application process to address the problem of low take-up.
Another aspect of the CPP affecting low-wage earners is the continued freeze of the minimum contribution – at $3,500 since 1996. It now amounts to only about $2,400 (in constant 2016 dollars). But if it had been indexed to the cost of living, this year it would come to $5,100. We question why the minimum contribution should be frozen when all other aspects of the CPP are indexed to real wages or the Consumer Price Index.
Other unknowns include the effects of the new agreement on disability and survivor benefits. There are also questions related to the promise of full funding for the expanded portion of the CPP. Despite the many questions, the CPP agreement is a welcome announcement. It bolsters one of Canada’s most important social programs for future generations and recognizes the need to help low-income workers through an enhanced Working Income Tax Benefit.
ISBN - 1-55382-672-8