Expanding the CPP May Not Be All It’s Cracked Up to Be

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Retirement income adequacy has been at the forefront of the news recently. With low interest rates and increased housing prices, individual and household debt levels are high. Canadians just aren’t saving enough for retirement.

But who is responsible for retirement planning? Some (rightfully) say individuals have primary responsibility for their own retirement. Others (arguably) say employers are responsible, too, since they’ve traditionally fulfilled that role—even before social security was implemented in North America.

One solution to the inadequacy issue is to expand the current government programs (i.e., the Canada/Quebec Pension Plan (C/QPP).

Inequity By Design

The most recent Statistics Canada income survey data show there were 26.2 million income earners in Canada in 2013. Of those, 18.2 million (70%) earned less than $50,000 per year; 7.3 million (28%) earned $50,000 to $150,000; and 0.7 million (2%) earned more than $150,000. The median individual income was around $32,000.

Several studies on the adequacy of Canadian social security—such as one conducted by the School of Policy at the University of Calgary—have found the current system performs well for low-income earners and relatively well for low-middle income earners. On average, the combination of Old Age Security/Guaranteed Income Supplement and C/QPP delivers adequate income replacement to maintain a low income earner’s pre-retirement standard of living. Given the Yearly Maximum Pensionable Earnings (YMPE) levels of $53,600 in 2015 and $54,900 in 2016, it’s reasonable to assume the current social security programs will continue to provide sufficient retirement income for low to low-middle income earners.

What does expanding the CPP really mean, then? For low and low-middle earners, not much. Essentially, it means more contributions for little to no change in retirement income adequacy. However, this group is needed to support the upper-middle earners, who will benefit the most from a CPP expansion. Some argue this is unfair, but if only those who will benefit from CPP expansion pay into it, the expansion will be too expensive.

Expanding the CPP would probably mean an increase in the YMPE or/and multiple tiers of contribution levels. Tiered contribution levels will create an additional burden for part-time workers, since more and more people are juggling two or three part-time jobs instead of maintaining full-time employment. These individuals would likely contribute at a lower rate but then find themselves owing additional CPP contributions based on their combined income.

So before we trumpet CPP expansion, let’s make sure its underlying foundations are solid and relevant. Providing sufficient retirement income to Canadians may require a totally different design—more than just expanding the existing program to try to make it work.

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