Agreement in Principle to a CPP enhancement
Overview
On June 20th, Canada’s Finance Ministers 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
- Increase the maximum amount of income subject to CPP by 14% (projected to be equal to roughly $82,700 in 2025)
At maturity, a Canadian who has consistently earned $50,000 annually throughout their working life would receive a yearly pension benefit of approximately $16,000 instead of the $12,000 they would currently receive. The maximum benefit, currently $13,110, will eventually rise to $17,478.
The phase-in will be long and gradual, beginning January 1, 2019. This will allow businesses for time to adjust – a requirement necessary to satisfy those provinces that were concerned about enhancing CPP during an economic downturn, given that the increased premiums will be deducted from workers paychecks.
Text of the Agreement in Principle
Canada’s Ministers of Finance agree in principle to a Canada Pension Plan (CPP) enhancement with the following design features:
- The income replacement level will be increased to one third of income
- The upper earnings limit will be targeted at $82,700 upon full implementation in 2025
- There will be a gradual 7-year phase-in beginning on January 1, 2019 consisting of:
- A 5-year contribution rate phase-in below the Yearly Maximum Pensionable Earnings (YMPE), followed by
- A 2-year phase-in of the upper earnings limit
- An increase to the Working Income Tax Benefit (WITB) to help low-income earners
- Tax deductibility for the enhanced portion of employee CPP contributions”
Source: http://www.fin.gc.ca/n16/docs/cpp-pc-eng.pdf
Explanation
The Working Income Tax Benefit will be increased in order to offset the impact of increased contributions on low-income workers. The federal government will also provide a tax deduction (not credit) for employee contributions associated with the enhanced portion of CPP.
When CPP comes into effect and is fully phased in, employer and employee premiums will increase by one percent each. According to an example put together by the government of BC, a worker earning $54,900 will see their contribution initially increase by an additional $7 per month, to be increased by approximately an additional $7 each year over the 5-year contribution rate phase-in. For comparison, the ORPP was to impose a joint employee and employer contribution of 3.8 percent (or 1.9 percent each) on annual income between $3,500 - $90,000.
All of the provinces, except for Manitoba and Quebec, have signed the Agreement in Principle. To move forward with such changes, the agreement of seven out of ten provinces representing two thirds of the population of Canada is required. The newly elected Progressive Conservative government in Manitoba requires more time to consider the proposal. Quebec did express support for a modest, targeted and gradual enhancement of the CPP and presented its own proposal to. Quebec will put its proposal forward to its citizens during its consultations on the Quebec Pension Plan.
Next Steps
The provinces and Ottawa have until July 15, 2016 to obtain Cabinet approval (an Order In Council) for the CPP expansion. Once approval is received, Ontario will stop the Ontario Retirement Pension Plan.
Premier Wynne had announced prior to the meeting that Ontario would stop the ORPP if there was agreement to enhance CPP by two thirds of the amount that the ORPP proposed. The provinces have less than a month to obtain orders in council from their cabinets so that Ontario would be able to officially halt the ORPP and cease incurring further costs.
Hon. Indira Naidoo-Harris, Ontario’s newly appointed Associate Minister of Finance (Ontario Retirement Pension Plan) would be part of the scaling down of the ORPP, and would be reassigned to other Cabinet duties. Ontario had yet to select a service provider for ORPP, which is where most of the costs would have been incurred. Premier Wynne, speaking to reporters on June 21st, committed to making the costs to date of developing the ORPP public. The ORPP legislation will stay in place until the House resumes; it will be reviewed, and may possibly be repealed.
Ontario was responsible for driving the discussion and Ontario’s strict timeline pushed this issue to the top of the agenda. Premier Wynne explained that, in order to continue driving the national discussion on CPP it was necessary that Ontario underline its commitment to an enhancement - via CPP or ORPP. Ontario made it clear that the province would move forward on the issue with or without the other provinces; since any discussion regarding changes to the CPP would require having Ontario at the table (due to the need to have 7 of 10 provinces representing two thirds of the Canadian population in agreement).
Background Materials
Government of Canada News Release
Government of Ontario News Release
