For the first time in 50 years, when the Canada Pension Plan (CPP) was created, new improvements are on the way.
That was the result of Monday’s federal provincial territorial agreement to expand the CPP. What does it mean for Canadians? And what does it mean for Ontario, which was about to ‘go it alone’ with an Ontario Retirement Pension Plan (ORPP)?
For all Canadians, there will be an improvement in their CPP benefit level: it will increase from 25 per cent to 33.3 per cent of pensionable earnings. And, there will be an increase in the yearly maximum pensionable earnings. The improvements will be phased in over the next nine years.
This is a welcome development.
Advocates had been looking for a larger increase in benefits; the Canadian Labour Congress had called for doubling of benefits since 2009. While yesterday’s agreement falls short of that benchmark, it does represent concrete progress on retirement security for the next generation of workers.
The inadequacy of retirement incomes for Canadians is well documented. At the Canadian Centre for Policy Alternatives, we have devoted resources to track the inadequacy and to highlight the role that public pensions should be playing in today’s labour market. They included work by Michael Wolfson, along with technical analyses of the design issues for the ORPP from 2014 through to 2016.
Despite the evidence, the previous federal government refused to move forward with CPP expansion. In the absence of federal leadership, the Ontario government committed to implement a made-in-Ontario solution (the ORPP), but it maintained all along that the CPP was the superior choice. We agreed.
The new federal Liberal government promised to expand CPP if the majority of provinces and territories agreed.
It wasn’t clear whether agreement was possible, especially due to the great deal of resistance to enhancing the CPP from employer groups and from the financial services industry.
So the agreement is big news.
I think it’s fair to say the Ontario government deserves a lot of credit for this development. The Ontario government has persevered in meeting its election commitments to enhance retirement security for Ontarians. Last month, it passed legislation to implement the ORPP. Without it, is very unlikely this agreement would have been reached.
The loss of the ORPP and the expansion of the CPP is a mixed blessing for Ontario workers. On the one hand the 8. 3 per cent increase in pension benefits under the CPP is less that the 15 per cent benefit level the proposed ORPP would have provided for Ontario workers. It also offered benefits on income up to $90,000.
However, CPP will have universal coverage, while the ORPP would not provide benefits for workers who have a comparable workplace pension plan. This expanded coverage will enhance retirement security for Ontario workers, as will the portability of benefits across the country.
An expansion of the CPP is the right way to modernize the retirement income system for the 21st century. The CPP is universal, providing pension benefits to all workers earning more than $3,500, throughout working life. The pension benefits follow you from job to job and for periods of self-employment as well.
These attributes are important given that this generation of workers is more likely to change jobs many times over their working life and less likely to have workplace pension plans.
The CPP provides a lifetime benefit that maintains its value over time as it is indexed. There is no need to fear that you will outlive your retirement savings or that they will be reduced by inflation as you age.
There have been concerns raised about the impact of an enhancement of the CPP on low-income Canadians. The spectre of low-income workers contributing to the CPP enhancement only to see that contribution clawed back in the Guaranteed Income Supplement was raised.
The ministers’ announcement Monday referred to an enhancement of the Working Income Tax Benefit (WITB). While there were not a lot of details available, it would appear that this would be aimed at mitigating the impact of a GIS clawback.
So, overall, a good news story: more Canadians will receive better retirement income security and the federal government has proven that the provinces and territories can indeed agree on needed improvements to a well-liked universal public program.
Sheila Block is a senior economist with the Canadian Centre for Policy Alternatives’ Ontario office. Follow her on Twitter: @Sheila_M_Block.