What changes are coming to the CPP?

• Increasing the income replacement rate to one-third from one-quarter, meaning the maximum CPP benefit will be about $17,478, instead of about $13,000.
• Increasing premiums on employers and employees by 1%, meaning an extra $408 a year coming off paycheques.
• Increased premiums will be phased in over seven years, starting in 2019.
• Increasing by 14% to $82,700 the maximum amount of income subject to CPP.
• Expanding the refundable tax credit known as the federal working income tax benefit, to help low-income Canadians offset the increase in premiums.
• New portion of employee contributions to CPP will be tax deductible (not a tax credit).

Only Manitoba and Quebec haven’t agreed to the changes — yet. Federal Finance Minister Bill Morneau says Manitoba needs more time to examine the deal since its government was only a few weeks old.

Read: Canada needs national approach to retirement income reform: IIAC

Quebec operates its own sister program of the CPP — the QPP. Quebec can adjust the QPP as it likes, but has typically followed the CPP. Quebec Finance Minister Carlos Leitao says he will raise QPP premiums according to the CPP deal. He would also phase them in over the same period.

But unlike the broader-based CPP reform agreement, he says Quebec would only raise premiums on income earned above $27,500. That’s why Quebec didn’t sign the agreement-in-principle, Leitao notes.

What these changes mean

Industry experts have mixed feelings about the news.

The Montreal Economic Institute notes that the gradual expansion of the CPP and QPP will have significant costs for workers and employers, which will reduce Canadians’ disposable income.

“Not only will middle class households see their disposable income fall during their working lives, but it is to be expected that they will reduce their voluntary saving as a result, for instance their RRSP contributions,” says Youri Chassin, research director at the MEI.

Read: Is Canada’s pension system world class?

The MEI adds the desire to expand the CPP comes from the belief that Canadians are not saving enough to maintain their standard of living in retirement. This notion, says the Institute, is completely false.

• The standard of living of the poorest households is well-protected in retirement. Canadians who are less likely to maintain their standard of living after age 65 are mostly found among the upper-middle class and the well-off, who already have the means to see to their own savings.
• Families include their houses as part of their retirement savings. In Canada, this non-financial asset represents over $1.8 trillion, which is much higher than the sum of all RRSPs and TFSAs.
• Canada continues to distinguish itself among industrialized countries with a below average elderly poverty rate.
• The poverty rate among the elderly is also lower than among the Canadian population as a whole.

Read: CPP expansion won’t help vulnerable seniors: study

“Instead of making saving mandatory for all workers, the federal government should make targeted changes aimed at those who really need help,” says Michel Kelly-Gagnon, president and CEO of the MEI. “It could also encourage Canadians to work longer by indexing the retirement age.”

Michel St-Germain, vice-chair of the Association of Canadian Pension Management’s national policy committee, tells Benefits Canada that concerns about the deal remain. It would’ve been nice if the deal included Quebec but he suggests that when it comes to Manitoba, it may come on board in the future. Read more.

Meanwhile, IFIC supports the deal. “Reaching national consensus on such a complex issue is a notable accomplishment,” says Joanne De Laurentiis, IFIC’s president and CEO. “We commend the ministers for their commitment to building on Canada’s strong retirement framework.”

And Fred Vettese, chief actuary of Morneau Shepell, tells Benefits Canada that despite its complexities, “an expanded CPP will ultimately prove to be the right call.” Read more.