Retirees on a beach.Getty Images/iStockphoto
In a mid-September speech to the Atlantic Provinces Economic Council in Charlottetown, Wes Sheridan, the Minister of Finance for Prince Edward Island, outlined the need for expansion of the Canada Pension Plan (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 clawbacks 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 per cent of the average wage and 200 per cent 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 intergenerational transfers.
Today, the CPP provides an inflation-protected defined benefit that replaces 25 per cent of annual earnings up to about $50,000. Contributions are 9.9 per cent of earnings or a maximum of about $4,600 a year (split 50/50 with one's employer). Currently, the maximum annual CPP benefit is about $1,000 a month, or $12,000 a year. The average payment is about half of this, or $500 a 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 doubled to $100,000, and there would be a new tier of benefits equal to 15 per cent of pensionable earnings, for a total 40-per-cent benefit.
This could be paid for with new contributions of about 3.1 per cent (shared 50/50 with one's employer – so 1.55 per cent each), starting at $25,000.
Assuming a 40-year career, for people 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 $2,250 a year.
Someone earning $75,000 would pay extra contributions of $1,550 (split 50/50) and would see a $7,500 rise in pension benefits annually. The maximum increase in benefits would be $11,250 – almost doubling the current maximum CPP benefit.
The PEI proposal states that these changes would be phased in over a relatively short period (two to three years). Further, Mr. 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 two-thirds of the provinces with two-thirds of the population of Canada (including Quebec). That is why previous reform proposals have failed.
The PEI proposal has received public backing from the Ontario government. 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 L. Brown is an expert adviser 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.