Need to expand the Canada Pension Plan

Poverty among older Canadians is exacerbated by the lack of savings by Canadian workers before they retire. Unless workers save more than they currently do through the Canada Pension Plan (including the Quebec Pension Plan), unacceptable levels of poverty among older Canadians will continue. These Canadians generally do not have access to private pensions sponsored by employers.

Some 35% of Canadian 65-plus currently receive a Guaranteed Income Supplement (GIS) benefit. The GIS program ensures a minimum annual income of only $13,683, i.e. the sum of the GIS and Old Age Security maximum benefit rates as of September 2008. This is lower than the deemed poverty level measured by the Low Income Cut-Off ($15,336 for 2008).

One solution is to expand the CPP to guarantee an adequate lifetime indexed pension to all Canadian workers upon reaching age 65.

The current CPP combined employer/employee contribution of 9.9% rate provides a benefit of 25% of a certain portion of pre-retirement income. However, the salary covered under the CPP is limited to the YMPE (Year’s Maximum Pensionable Earnings), i.e. $46,300 for 2009, the deemed average salary of all Canadian workers.

The expansion of the CPP would:

– provide an additional 45% retirement pension benefit rate, bringing the existing 25% up to 70% of pre-retirement income

– be financed by an additional combined employer/employee full-cost contribution rate bringing the total contribution rate to:

———> 19.8% (i.e. 9.9% + 9.9%) applying to the portion of contributory earnings not exceeding the YMPE ($46,300 for 2009)

———-> 15.4% (i.e. 0% + 15.4%) applying to the portion of contributory earnings comprised between the YMPE and the salary limit applying to Registered Pension Plans (RPPs) contributions, which is $116,667 for 2009.

Ultimately, after a 47-year transition period, the expanded CPP would essentially replace all existing RPPs, as it would provide a 70% benefit rate through a combined employer/employee contribution rate of 19.8% of salary up to YMPE and 15,4% on the excess up to the RPP limit.

Upon its implementation, the above expansion of the CPP would temporarily postpone some government revenues due to income tax deferrals applying to the additional contributions made to the CPP and the QPP. However, this would be partially offset because of:

– the immediate discontinuation of the actual income tax deferrals applying to the contributions to all existing RPPs, as they would be replaced by the expanded CPP

– the reduction in RRSP room brought about by the CPP expansion

– the gradually decreasing GIS expenses caused by the CPP expansion.

For low income workers, the CPP expansion would provide a retirement benefit that exceeds the current income support levels. For example, the expanded 70% coverage would provide a lifetime indexed pension of $21,000 to a contributor with an average indexed career average salary of $30,000. This way, GIS benefits would not be needed for such individuals and their retirement income would amount to about $27,000 with the inclusion of the OAS (i.e. about $10,000 more than under existing conditions). The extra required contribution may be a significant burden for a low income earner but would be balanced by the additional contribution from the employer and a better retirement in the future.