Is the new CPP really better?

Low understanding of revamped system not good for democracy

My favourite line from the backgrounder the federal department of finance just put out on the Canada Pension Plan reforms it agreed to in June is the following: “With the automatic collection of contributions for all workers, the CPP is a simple way to save.”

Well, yes. I don’t have to do anything at all when the government extracts my pension “contributions” from my salary before I even get that salary. Maybe the idea will have legs: The Canada Television Purchase Plan is a really simple way to take care of you HD needs: We take five per cent of your salary and send you a TV in return. You are saved the awful burden of choosing a home entertainment system yourself. What could be simpler?

The meat of the reform, which the rest of the country is undergoing because Ottawa didn’t want Ontario setting up its own version of the CPP, is that: the CPP payroll tax, euphemistically called the “contribution rate,” will rise from 9.9 to 11.9 per cent; the income replacement rate will jump from a quarter to a third; and the income level at which all this ceases will go from $58,000 to a hefty $82,700.

This is all done in the name of helping Canada’s hard-working but apparently somewhat dim middle class — dim because they’re assumed incapable of deciding their own retirement needs all on their own and saving accordingly, despite substantial fiscal incentives to do so.

Helping the middle class is a piece of the Trudeau government’s permanent focus on this vote-rich demographic. (To paraphrase Lincoln on the poor: God must have loved the Canadian middle class: He made so many of them.) The Liberals must be hoping middle-class voters will be more impressed by the future increase in benefits than the immediate increase in payroll taxes. Funny about that, though: if in their political judgments voters really are able to weigh future benefits against current costs, you might think they’d also be capable of making intelligent saving choices.

Many Canadians were puzzled by the high priority a newly-elected reformist government gave to cutting the income tax rate in the $45,282 to $90,563 range, thus giving a tax break to everyone making over $45,282 (even if it took it back from those earning over $200,000 by raising their top rate by four percentage points).

The people in our society who are really hurting, you might think, are the people at the bottom, not the middle, even if those in the middle vote more dependably.

The CPP reform explicitly excuses low-income Canadians from the CPP rate increase by increasing the Working Income Tax Benefit (WITB) by roughly the hiked amount of CPP tax — this despite the fact that the backgrounder says the change in the CPP provides a net benefit all on its own: bigger pensions for slightly higher “contributions.” So it’s a double benefit for lowincome earners: a supposedly better pension deal plus more money in the WITB.

So, to make the CPP tax hike more palatable for those with too much income to receive WITB, the new contributions will be tax deductible.

By contrast, a tax credit will continue to apply to existing contributions. So part of the very same payment will get a tax credit and

part a tax deduction. (Do not try this at home!) Finance’s reason for providing the deduction is that other savings, such as RRSPs and private pension plans, get tax deductions. If a company responds to a more generous CPP by downsizing its pension plan, or if an individual saver reduces his or her RRSP contribution, the effective tax on saving would rise as tax-favoured private plans declined and the fully taxed CPP became a more important share of people’s saving.

As the new measures are supposed to increase saving overall, that would hardly do. Allowing a deduction for the new part of the CPP (but not the old) means any such switch is tax-neutral.

Except that Canadians aren’t supposed to be doing what this new tax deduction implies they might: that is, reducing (voluntary) private saving as (compulsory) public saving goes up. The whole idea is to increase savings. Because Canadians aren’t saving enough. But Finance concedes that’s what people might just do. Now, did you catch all that? We began with the backgrounder’s admiration for how simple and easy public pension plans are. Simple and easy? I may be roughly capable of understanding my own individual savings trade-offs. I doubt more than one or two per cent of Canadians will fully grasp how their new re-vamped CPP is going to work.

That can’t be a good thing for democracy.