Key Points from Canada’s 2024 Federal Budget and Strategies for our clients. Click Here.

Reform of the CPP is a step in the right direction

Reform of the CPP is a step in the right direction

July 7, 2016

3d white man with green tickImprovements to the Canada Pension Plan will be beneficial for future retirees. On June 20 the federal government reached an agreement with most provinces that will see CPP benefits increase in the future.

This is welcome news to millions of Canadians.

CPP started 50 years ago and has not had any significant increase to benefits during that time. The last major change was during the 1990s when contribution amounts where increased to ensure the CPP was financially sustainable.

Previous attempts to reform the CPP have failed. The federal government and provinces could not agree on how to reform the current plan.

No sense in duplicating federal efforts

Ontario decided to start its own version of a provincial plan and announced the Ontario Retirement Pension Plan. While it was noble of our province to attempt to augment retirement income, completely duplicating the federal efforts made no sense at all.

Government programs cost money to implement. For one province to completely duplicate the activity of the federal government, in my opinion, was not economically justifiable.

Finally the federal and provincial Finance Ministers have agreed on pension reform. Ontario Finance Minister Charles Sousa said if the new reforms are implemented then Ontario would drop plans for its own provincial initiative.

Changes will be slow

There will be changes, however the changes will be slow. A seven year phase-in will likely start on January 1, 2019. Workers and their employers will contribute more to the plan.

The current CPP plan requires employers and employees to each contribute 4.95 per cent of income between $3,500 and $54,900. The proposed CPP plan will increase the eligible earnings that will require pension contributions to $82,700 by the year 2025.

Employers and employees will each increase their contribution by one per cent to a contribution level of 5.95%.

The significance of the proposed CPP is its impact on retirement funding. The current CPP has an objective to replace 25 per cent of your earnings to a maximum salary of $54,900.

CPP reformThe new plan will increase the salary ceiling to $82,700 with the objective to provide funding equal to one third of a worker’s salary level.

In summary, retirees will receive a higher percent of their previous earnings to a new higher salary limit. Many Ontario residents will receive more CPP payments during retirement.

There is both good and bad with the announcement of pension reform. We agree pension payments from CPP should be increased and for that we congratulate the respective governments for this accomplishment.

The suggestion that Ontario will drop its own pension plan idea is also good news.

The bad news is the reform conversation did not include the bigger issue. The Canadian pension problem is based on us having a two-tier system of the “have and have-nots”.

Most government workers have an extremely generous pension. Most non-government workers do not.

Unions have asked our government to pay large pensions to retired government workers and our government has agreed. My question to our federal government is if it is a good idea to pay large pensions to government retirees, why not share that idea with retirees that had worked in the private sector.

CPP reform is a step in the right direction.

What we need now is a national conversation about the fairness of retirement income paid to retired government and private sector employees.