A proposed expansion of the Canada Pension Plan (CPP) is grinding its way through Parliament. The proposed bill aims to expand CPP benefits and to increase the premiums required to fund that expansion – although the full impact of the changes will not be felt for several years.

As Investment Executive went to press, the bill to amend the CPP (Bill C-26) was in the midst of its second reading, allowing lawmakers to debate the details of the proposal, which seeks to implement the agreement reached in the summer among nine provinces and the federal government. Quebec isn’t part of the agreement, but has pledged to adopt similar changes to its provincial plan, which is managed separately from the CPP.

Government intervention

Given that the ruling Liberals have a majority government, the passage of Bill C-26 seems certain despite the ongoing objections of the Opposition, the Conservatives. The Tories argue that an expanded CPP entails too much government intervention and reduces the ability of Canadians to save for themselves. The Opposition also characterize the required premium increases as a tax hike.

Assuming that the legislation is passed as expected, Bill C-26 would boost CPP benefits, including higher retirement pensions, larger survivor and disability pensions, and bigger post-retirement benefits.

The rise in benefits will come in two ways: the basic benefit rate will increase to 33% of earnings from the current 25%; and the maximum pensionable earnings will increase by 14%. The reforms will require higher CPP contributions starting in 2019 to fund the increased benefits. All of these changes would be phased in over several years, with the biggest changes coming in the last couple of years of the phase-in period.

Bill C-26 will create a new CPP account to manage the new, enhanced portion of the pension plan to facilitate the expansion of benefits and contributions. The new legislation will facilitate transfers between the CPP Investment Board and the new account and subject the expanded part of the plan to legislative oversight.

Although these changes are significant for such a fundamental public entitlement, the bottom-line impact of the enhanced CPP on the finances of most clients should be relatively modest. The biggest beneficiaries of the changes will be young workers, who will be paying into the enhanced plan for a larger portion of their working lives. The enhancements will have relatively little effect on the benefits of most older people.

For example, according to Finance Canada’s analysis, the enhanced CPP will provide less than $1,000 in additional annual benefits for a worker earning $75,000 a year who is age 60 in 2025 (when the enhancements are slated to be implemented fully, and assuming that he or she retires at age 65). For a worker who is just 25 years old in 2025, the enhanced plan will provide almost $7,000 in added annual benefits when he or she retires in 2065.

Modest increases

On the contribution side, the planned increases also will be relatively modest – initially, at least.

At the high end of the income scale, the annual employee contribution to the CPP will rise by an estimated $85 in 2019; then will rise steadily during the rest of the seven-year phase-in period, reaching $1,100 in additional annual contributions in 2025.

For lower-income workers, the annual contribution will rise by just $35 in 2019, escalating to $240 over the phase-in period.

The additional contributions are designed to be tax-deductible, so that, to the extent that these extra CPP premiums displace some private savings (reducing RRSP contributions, for example), the after-tax cost of saving shouldn’t increase.

The effort to bolster the CPP is not the only change to the retirement savings system proposed by the federal government over the past year. As part of the 2016 budget, Ottawa moved to roll back the previous government’s decision to increase the basic retirement age – at which seniors can collect old-age security (OAS) and guaranteed income supplement (GIS) benefits – to age 67 from 65.

The government also pledged in the budget to produce a new cost-of-living index that more accurately reflects the actual costs faced by seniors. The proposed seniors price index would be used to gear OAS and GIS benefits to the rising cost of living for seniors, in place of the more general consumer price index. This move will have the effect of accelerating increases in those benefits.

So far, the government has yet to unveil the new index. In mid-October, a senior official from Employment and Social Development Canada told a House committee that her department is working on the proposed new index along with Statistics Canada.

While the proposed changes to the pension system will be historic, the impact on most clients’ finances will be relatively modest to start. Even when the changes are fully phased in, they are likely to remain relatively marginal.

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