Financial sector welcomes changes
Proposals met warmly, but some fear pressure on wages, lost jobs
A group representing most major banks, insurance companies and other financial services in Toronto says it welcomes a federal-provincial agreement in principle to expand the Canada Pension Plan.
“We think a national comprehensive approach is the way to go,” Janet Ecker, chief executive officer of the Toronto Financial Services Alliance, said Tuesday.
While sympathetic to groups complaining that it could increase the cost of doing business, Ecker said an expanded CPP is the most cost-effective solution, especially for Ontario.
Ontario Premier Kathleen Wynne had campaigned on a plan to bring in a provincial pension plan to address shortfalls in the national system.
“The worry was it would undermine a lot of successful, legitimate (retirement savings) products in the investment industry,” Ecker said.
The more familiar and established CPP is less likely to disrupt employer-sponsored pension plans, like those offered through Sun Life Financial or Manulife Financial, she said.
The financial services alliance had called for a “more targeted approach” to an expanded CPP, aimed at groups living below the poverty level, modest-income Canadians and encouraging workplace retirement savings, Ecker said.
Now that Ottawa and eight of 10 provinces have agreed to an expanded CPP, the Ontario Registered Pension Plan (ORPP) will not go ahead pending ratification of the CPP deal by mid-July, Ontario Finance Minister Charles Sousa confirmed Tuesday.
Federal Finance Minister Bill Morneau announced Monday that a majority of Canadian provinces and the federal government have agreed in principle to a modest expansion of the retirement benefits payable under the Canada Pension Plan, to be phased in over seven years, beginning on Jan. 1, 2019.
All provinces except Quebec and Manitoba have agreed to the deal, which will shape the future design of retirement plans across Canada.
The plan aims to enhance CPP benefits for all Canadians, while also ensuring middle-income earners are setting aside more for their retirement.
Under the current CPP, employers and employees each contribute 4.95 per cent of a person’s pensionable earnings between $3,500 and $54,900, up to a yearly maximum of $2,356.20. Self-employed workers must pay both portions for a total of 9.9 per cent.
The new agreement would see the upper salary limit progressively increase to $82,700, and would aim at moving from a payout of 25 per cent of earnings to a 33-per-cent payout.
A person earning $50,000 a year would be eligible for a maximum CPP benefit of $16,000 instead of the current $12,000 once fully implemented.
To help cover the cost, the contribution rate for all employees and employers will rise by 1 percentage point from the current 4.95 per cent to 5.95 per cent.
The increased contributions are to be phased in starting in 2019, coming into full effect in 2025 to give business time to adapt.
Low-income earners would get help managing the increase in their CPP contributions by an increase in the Working Income Tax Benefit. Employees contributing to the enhanced portion would be able to claim a tax deduction on the amount.
TD Bank economist Brian DePratto called it the “the first major change” to the structure of Canada Pension Plan since 1965. While full details are not yet available, the proposed changes represent “a significant, guaranteed enhancement” to most Canadians’ retire- ment incomes, DePratto wrote in a research note Tuesday.
The changes should help close the savings gap among middle-income Canadians, he said.
For example, someone making $90,000 per year in 2016 is contributing $2,544.30 to their CPP, DePratto said in an interview.
By 2025, their annual contribution will nearly double to $4,712.40, both because the rate will rise by 1 percentage point to 5.95 per cent and also because more of their income will be included under the new higher thresholds.
The Canadian Federation of Business called the scheme a “long-term drain” on the economy leading to job cuts, downward pressure on wages, and the risk of business closures, especially during a time of economic uncertainty.
More than one-third of employed Canadians said such increases will reduce their ability to spend on essential goods and services, the small-business advocacy group said in a statement.
The scheme will be “doubly damaging” for many employees and their employers by raising the rate of contributions and amount of income covered, the group said. The Canadian Chamber of Commerce warned that an expanded CPP will have repercussions on “an already fragile business sector.
“We strongly support any program that will allow Canadians to save towards their retirement — as long as it is done on their own terms,” the group said in a statement.
The announced agreement to expand the CPP will basically be a form of payroll tax that, when it is in full force, will put further financial strain on Canada’s already struggling businesses and on the middle class, the group said.
CPP rates will have to increase if the income replacement rises from one quarter to one third, but the government has so far not stated how much this will cost, the group said.
“When a government promises big increases in benefits without telling us how much it will cost or who will pay for it, we know there’s a big bill coming,” the group said.
The silver lining of the agreement is that it likely means Ontario will not be moving ahead with its separate plan, the ORPP, which would have been an even worse strain on businesses of that province, the group said.
“We strongly support any program that will allow Canadians to save towards their retirement — as long as it is done on their own terms.” CANADIAN CHAMBER OF COMMERCE