Canada reaches agreement on expanding national pension plan

(Bloomberg) — Canadian provinces have reached an agreement with the federal government to expand the Canada Pension Plan, adding new payroll taxes to boost benefits while fulfilling a key pledge made by Prime Minister Justin Trudeau in the 2015 election campaign.

The expanded CPP is aimed at countering dwindling workplace pension access for younger generations pinched by a weak economy and soaring home prices. The expansion would be introduced in 2019 and rolled out over seven years, increasing both contribution rates and the threshold for taxable income to boost benefits.

Federal Finance Minister Bill Morneau said the pact is essential at a time when younger workers are saving less for retirement.

"It's an historic day," Morneau said in Vancouver, where he met Monday with provincial and territorial finance ministers to reach a pact. The expansion is "very gradual" and will therefore "be one that small and medium-sized businesses can adapt to."

The changes to payments haven't been finalized and are still subject to actuarial review, said David Barnabe, a spokesman for the Department of Finance. Beginning in 2019, the contribution rate will steadily rise over five years to 11.9 percent — split between a worker and employer — from the current 9.9 percent, he said. The maximum pensionable earnings cap, currently C$54,900 ($42,900), will also increase through indexation.

Then, in 2024 and 2025, the government will create a new tier by raising the pensionable earnings cap to C$82,700, an estimated increase of 14 percent from the roughly C$72,500 to which it will have climbed through indexation. Workers and companies will together pay an "expected" CPP contribution of 8 percent on income in the new tier, Barnabe said.

Maximum Benefit

The plan, if passed, will also raise the maximum CPP benefit, with the plan designed to replace one-third of pre-retirement income rather than the current one-quarter. The government said it will also make changes to the Working Income Tax Benefit and add a tax deduction for some CPP contributions to mitigate the cost for workers.

Two of Canada's 10 provinces, Quebec and Manitoba, didn't sign on to the changes but will still take part in talks. A change to the CPP formula requires the support of seven of 10 provinces representing two-thirds of the population, and Monday's deal meets both tests.

Ontario, Canada's most populous province, had pushed for the national CPP deal and said it would abandon its own Ontario Retirement Pension Plan if it got a cross-Canada pact.

"What we're doing today is not for any one of us on stage, it's very much for our children," Ontario Finance Minister Charles Sousa said, calling the changes "adequate and timely."

'Payroll Tax'

The agreement will heap more burden on Canada's private sector at a time of low growth, the Canadian Chamber of Commerce warned. The expanded CPP "will basically be a form of payroll tax which, when it is in full force, will put further financial strain on Canada's already struggling businesses and on the middle class," Chamber President and Chief Executive Officer Perrin Beatty said in a statement.

Quebec Finance Minister Carlos Leitao said the province, which has its own pension plan that mirrors the CPP, supported much of Monday's agreement, particularly on middle-income workers, and would examine what it could do to mitigate the impact of higher premiums for low-income workers. Manitoba, where a new government took power this year, remains a constructive partner in talks, Morneau said.

British Columbia Finance Minister Mike de Jong, whose province had been cautious about any change heading into the meeting, said it agreed to the final solution because the numbers changed. The province supports the "modest" enhancement and multi-year phase-in, and thinks it's important to have a national pact that ensures portability of benefits for those moving between provinces, de Jong said. "I think we have reached a balanced approach," he said.

Economic Impact

Federal Conservative lawmaker Lisa Raitt, in a statement before the deal was announced, criticized the notion of an expansion. "Canadians already pay too much tax; they don't need to pay more. A CPP premium hike is a tax on workers, families and businesses," Raitt said.

A Conference Board of Canada study found Ontario's unilateral plan would cost jobs and lower the province's gross domestic product by 2025 before providing a boost long-term. Sousa doesn't expect a similar short-term hit to the economy as a result of the national deal.

"Not really, because the report suggested we would do this all at once. We're doing this over a graduation," beginning in 2019, the Ontario finance minister said. "It won't have an impact today."

The existing CPP requires contributions of up to C$2,544 per year, per person, from both an employee and an employer. Trudeau, who took power in November of 2015, campaigned on enhancing the CPP.

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