Who will ben­e­fit from ex­panded CPP?

It’s not who you think. Likely gov­ern­ment, high-in­come work­ers; likely not ev­ery­one else

The Guardian (Charlottetown) - - OPINION - BY ROBERT L. BROWN Robert L. Brown is an ex­pert ad­viser with Ev­i­denceNet­work.ca and Fel­low with the Cana­dian In­sti­tute of Ac­tu­ar­ies.

It was as re­cently as June 20, 2016 that the fed­eral and provin­cial Fi­nance Min­is­ters agreed to ex­pand the Canada Pen­sion Plan (CPP). This is such a re­cent event, in gov­ern­ment terms, that many of the de­tails of ben­e­fit en­ti­tle­ments, costs and in­vest­ment cri­te­ria are still not known.

But it has been long enough for those who are deep thinkers on mat­ters of so­cial se­cu­rity to have had time to delve into the macro pro­pos­als and is­sue some se­ri­ous con­cerns. The key cau­tion: who re­ally ben­e­fits? Turns out, it’s not low or mid­dle-in­come work­ers.

The Cana­dian Re­tire­ment In­come Se­cu­rity sys­tem is made up of a va­ri­ety of mov­ing parts: Old Age Se­cu­rity (OAS), the Guar­an­teed In­come Sup­ple­ment (GIS), the CPP, plus pri­vate sav­ings in work­place pen­sion plans, Reg­is­tered Re­tired Sav­ings Plans and TaxFree Sav­ings Ac­counts.

So it is not sur­pris­ing that af­ter a year, two thought­ful com­men­ta­tors, Bob Bald­win and Richard Shilling­ton have is­sued a crit­i­cal pa­per from the In­sti­tute for Re­search on Public Pol­icy, point­ing out some very se­ri­ous neg­a­tive con­se­quences of an ex­panded CPP.

Bald­win and Shilling­ton state that poorer Cana­di­ans with in­come (other than OAS, which is ex­empt) per­sis­tently less than $25,000 will get no net ben­e­fit from the en­hanced CPP tier 2 ben­e­fits for which they have paid (a rel­a­tively rare event for mar­ried cou­ples).

Here’s why.

The Cana­dian Guar­an­teed In­come Sup­ple­ment is a wel­fare pay­ment meant to help only those at­tempt­ing to live on very low in­come. Once a re­cip­i­ent earns some rel­a­tively mod­est in­come level, their GIS ben­e­fits are “clawed back.” This claw back is equiv­a­lent to a 50 per cent tax rate on earned in­come over the de­fined level and, be­cause seven prov­inces have sim­i­lar top-ups with sim­i­lar claw backs, the ef­fec­tive tax rate can be as much as 100 per cent.

In other words, there is vir­tu­ally no in­cen­tive for a low-in­come worker to save for re­tire­ment or to take paid em­ploy­ment, es­pe­cially once one is re­tired and re­ceiv­ing the GIS.

The new tier of ben­e­fits is meant to be “fully-funded” which means that work­ers will have to pay in full for any new ben­e­fits they re­ceive.

So, we have a sys­tem that man­dates that work­ers — even low-in­come work­ers — have to make full con­tri­bu­tions to buy their new ben­e­fits. Why is this a prob­lem?

When per­sis­tently low in­come work­ers re­tire, they will find that their GIS ben­e­fits (paid for out of gen­eral tax rev­enues) will now be clawed back. Most of them will re­ceive noth­ing more in to­tal ben­e­fits even though they have been forced to pay in full for the ex­panded CPP.

Overall, the pic­ture is very dif­fer­ent from that por­trayed by our politi­cians. Cana­di­ans will pay for their new CPP ben­e­fits in full through work­place con­tri­bu­tions. No gov­ern­ment cost at all.

In fact, the por­trait is even rosier for gov­ern­ments. Be­cause of higher ben­e­fits from the new CPP, tax rev­enues will rise $2.7B (once the sys­tem is ma­ture) and OAS/GIS ben­e­fits will fall $2.1B be­cause of the claw backs.

Fur­ther, be­cause OAS ben­e­fits rise with in­fla­tion, but wages rise with the growth rate of the econ­omy (usu­ally higher), the re­place­ment rate pro­vided by the OAS will fall as a per­cent­age of av­er­age wages over time. There will be no net gain at all for both low and mid­dle-in­come work­ers.

Overall, Bald­win and Shilling­ton ask: “Who ben­e­fits from an ex­panded CPP?”

The gov­ern­ment — likely. High-in­come work­ers — yes. But not ev­ery­one else. And, in fact, low in­come work­ers may even see a re­duc­tion in overall ben­e­fits.

One can­not just amend one part of the sys­tem with­out an­a­lyz­ing the im­pact on the to­tal sys­tem.

So far, the fed­eral gov­ern­ment seems not to have taken this into ac­count.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.