Expanded CPP – Vancouver June 2016


For those that missed yesterday’s news, Canada’s provincial finance ministers and federal finance minister Bill Morneau met in Vancouver to hammer out a deal to expand the CPP.

Politics 101

This moment again proves how little I understand about politics.  If you asked me Sunday I would have told you that I didn’t see a deal coming.  First, expanding the CPP is a very difficult task since improvements have to be fully funded and it takes 40+ years to make meaningful changes.  Second, Ontario has been pushing ahead on its own Ontario Retirement Pension Plan even though the federal  Liberal government campaigned on a commitment to expand the CPP.  Why would Ontario do that if a federal deal was remotely possible?  Interestingly, Jason thought they would reach a deal – so I guess Actuarial Solutions Inc. is in good hands with our next generation of leaders.

The Deal

There will be more information in the coming weeks but broadly, here is what we are being told:

Canada’s Finance Ministers have agreed in principle to work on a CPP enhancement starting January 1, 2019 that would:

  • increase income replacement from one quarter to one third of pensionable  earnings—this means that, at maturity, a Canadian with $50,000 in constant  earnings throughout their working life would receive a yearly pension benefit of  around $16,000 instead of the $12,000 they would currently receive, or $4,000 more per year; and
  • increase the maximum amount of income subject to CPP by 14%, which is projected  to be equal to roughly $82,700 in 2025.

To ensure that these changes are affordable for businesses and Canadians, our governments are taking three measures:

  • introducing a long  and gradual phase-in starting on January 1, 2019 that will allow more time for  businesses to adjust;
  • enhancing the federal  Working Income Tax Benefit as a means of offsetting the impact of increased  contributions on low-income workers; and
  • providing a tax deduction—instead of a tax  credit—for employee contributions associated with the enhanced portion of CPP in  order to avoid increasing the after-tax cost of saving for Canadians.

Deal or No Deal

Everyone signed on except Quebec and Manitoba – and they don’t represent enough Canadians to stop the deal (Quebec has their own QPP to address when the time comes).  In a small footnote, a tight deadline has been set to approve the details of the deal by July 15, 2016.  I don’t know how a province could easily back out now but I wonder if the deadline is intended to give Ontario an out to keep going ahead with the ORPP.

The Math

Of course, missing in this whole story is the details of the phase-in.  Will each generation of worker get what they pay for, or as we did the last time around, will future generations pay for those that retire near term.  It is a bit of a no win for the government – because either they provide near meaningless benefits for people retiring in the next 20 years – or they are going to provide a meaningful benefit to my generation for which our kids’ generation will be paying.

This is why expanding the CPP has been so elusive – politicians are loathe to make choices that pay off long after they are out of politics.  Although I am still against expanding the CPP as a matter of risk management (too many eggs in one basket) I will admit that I am impressed with the far sighted approach that our governments might actually be taking here.  I will of course be looking for the details and will keep you posted.

The Aftermath

So now what happens to the ORPP?  Cancelled in theory.  What happens to the staff – super generous severance packages I am sure.  I am not sure how much detail we will get on the money that was wasted since October 2015 when the federal Liberals were elected, but surely it is millions that we just didn’t need to spend.

In the meantime, when we get more details, we will be in touch with our clients to discuss what this means for the retirement and savings plans that they sponsor.



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