RBC predicts healthier growth for Canada this year

The recently agreed expansion of the Canada Pension Plan (CPP) will not help, and may actually hurt, low-wage workers, argues a report published Wednesday by the C.D. Howe Institute.

According to the report from Toronto-based think tank, the expanded CPP will deliver significantly improved pension coverage for most younger workers over time, but for low earners the benefits will be minimal, or even negative.

The report notes that low-income workers are already well covered by the existing public pension system, and that many earn more in retirement than they do from working. Additionally, much of the added CPP benefits will be clawed back because of the income-tested component of the Guaranteed Income Supplement (GIS), which impacts about one-third of seniors.

The report suggests that some workers could find that the additional contributions cause them to experience lower living standards in the present, in exchange for minimally-higher living standards in the future.

“Expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow,” the report says.

To address the issue, policymakers could either exempt certain low earners from expanded coverage, the report suggests, or exclude the expanded CPP benefits from the income test for the GIS.

“This adjustment means that lower-earners would receive better value from their expanded CPP benefits; they would not see their expanded CPP benefits reduce their GIS payments,” the report says.

Apart from the concern for the impact on low earners, the report finds that an expanded CPP will “substantially raise” expected benefits for most young workers. For lower- and middle-earners, the report calculates an eventual benefit increase of about 33% over the existing CPP, and for high-earning workers, it projects a 50% increase.

“These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades,” the report says.

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