Royce Shook

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Canada Pension Plan premiums are going up: is it a tax or an investment?

Two sides to the same coin. If you view the CPP as an investment in your retirement funds, you see the logic of the following argument:

The last time CPP contributions were increased was 1997. During the entire seven years, the increase was phased in, employment rose and the economy steadily grew – and that time benefits to workers weren’t even increased. 

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From 1997 until 2019, the CPP retirement pension replaced one-quarter of your average work earnings. This average is based on your work earnings, up to a maximum earnings limit each year. Other sources of income—such as the Old Age Security program, workplace pensions and private savings—make up the rest of your retirement income.

As of 2019, the Canada Pension Plan (CPP) is being gradually enhanced. This means you will receive higher benefits in exchange for making higher contributions. The CPP enhancement will only affect you if, as of 2019, you work and make contributions to the CPP.

The enhancement means that the CPP will begin to grow to replace one-third of the average work earnings you receive after 2019. The maximum limit used to determine your average work earnings will also gradually increase by 14% by 2025.

The maximum pensionable earnings under the Canada Pension Plan ( #222222;">CPP) for2019 will increase to $57,400 (from $55,900). The employee and employer contribution rates for 2019 will increase to 5.1% (up from 4.95%), and the self-employed contribution rate will increase to 10.2% (from 9.9%.

The enhancement increases the CPP retirement pension, post-retirement benefit, disability pension and survivor’s pension you may receive. Eligibility for CPP benefits is not affected. 

Your pension will increase based on how much and for how long you contribute to the enhanced CPP. The CPP enhancements will increase the maximum CPP retirement pension by up to 50% for those who make enhanced contributions for 40 years.

The enhancement also applies to the CPP post-retirement benefit. If you are receiving the CPP (or QPP) retirement pension and you continue to work and make CPP contributions in 2019 or later, your post-retirement benefits will be higher.

CPP contributions are not a tax. They are savings put aside in return for a pension benefit in retirement. They are an investment by workers and their employers into a pension plan that is safe and sound. The savings in the CPP will eventually be spent in 10, 20 and 30 years, and will help create jobs in the future.

Corporations have more than enough room to contribute to expanding the CPP, which will provide greater future retirement benefits for today’s workers. Companies outside the banking industry have seven times as much cash in the bank than they did last time CPP contributions were raised. Businesses’ income tax has also dropped 13 percentage points since the 1990s.

Increasing CPP premiums has never cost us jobs. In fact, people with better pensions will be able to spend more in their retirement – and that spending creates jobs. 

Small businesses know that CPP is the best value for their money with its low management costs, portability and security. As self-employed workers, owners are contributing and benefiting from CPP. Expanding the CPP gives small business owners the risk-free stability of a defined-contribution savings plan and a guaranteed defined-benefit pension plan for their workers. A poll of small businesses in Ontario showed that a majority of small and medium-sized businesses favoured an expanded CPP.

If you see the CPP increase as a Tax and believe that workers, not society are responsible for saving for their own retirement without government help, then you will see the logic of the following argument:

One of the biggest challenges employers will face starting in 2019 is a multi-year schedule of Canada Pension Plan (CPP) increases, which will raise their payroll costs and leave them even less room to maneuver and make adjustments. Employees to face up to seven straight years of smaller paycheques, starting January 1.

With these hikes on the horizon, employers will have less capital to reinvest in their business in order to grow, innovate, replace equipment or reach new markets. Employees will also have less take-home pay to spend, which will hurt the Canadian economy and our competitiveness. In return, retirement, disability and survivor's benefits will begin to increase from one quarter to one-third of an employee's average work earnings.

In a report conducted in partnership with the University of Toronto's Policy and Economic Analysis program, it was found that the increases could result in 64,000 lost jobs, a loss 4.5 times greater than the government's predictions. The impact on jobs will continue to be felt until the late 2020s, after which it will mostly manifest in constrained wage growth for employees and the resulting higher deficits for the government. Employees could also see their disposable incomes go down by an average of $700 by 2025.

What's especially concerning is that most Canadians are misinformed about CPP, how it works and the effect it will have on them. For example, almost 40 percent of Canadians think the government pays for part of CPP (it doesn't). Three quarters don't know that it will take 40 years for the full increase in benefits to take effect.

But an even more jarring statistic is the number of Canadians who oppose the CPP increases when they learn of the potential effects on their wages. A full 70 percent oppose the hikes if it means that their wages may be frozen as a result, and that number rises to 83 percent if the premium hikes result in cuts. Clearly, the government has more work to do educating and consulting the public before pushing through the increases in 2019, but time is running out.

What the push to expand CPP contributions comes down to is a paternalistic concern that employees are not responsible enough to plan for their retirements and that the responsibility should be offloaded to employers. This, despite the fact that two-thirds of Canadians are actively saving for their retirement already.

If the government truly wants to help Canadians plan for their retirements, it would serve them better by increasing contribution limits on registered retirement savings plans and tax-free savings accounts, which are preferred by both employees and employers because they offer more flexibility than CPP. 

Policymakers should focus their efforts on educating Canadians about the savings options available to them, including Pooled Registered Pension Plans (PRPPs) and the importance of starting their retirement planning early. The government could also just increase the employee premiums on CPP to mitigate some of the most concerning effects that the hikes will have on jobs and wages.

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