Written by: Gwyneth James MBA CPA, CGA, Senior Partner
The federal government has proposed enhancements to the Canada Pension Plan (CPP) that appear to have addressed the provincial government’s concerns about the retirement savings of Ontarians. If the CPP changes are ratified on July 15th, the proposed Ontario Retirement Pension Plan (ORPP) will be scrapped. Most businesses and taxpayers will be relieved that this extra layer of administration will not proceed, but there is still a question as to whether or not an enhanced CPP was ever necessary.
Opposition to enhancing CPP centers around disagreement about whether Canadians are saving enough for retirement. The federal government is concerned about the number of Canadians in workplaces without pension plans and the low rate of RRSP contributions. The Fraser Institute, on the other hand, believes most Canadians are well-prepared for retirement, pointing out that while pension assets are not keeping pace, other assets like real estate and non-registered investments are more than compensating.
In effect, CPP forces a taxpayer to save for their retirement. The average contributions through payroll deductions are used to determine how much you will receive when you retire. There are partial benefits extended to a surviving spouse, similar to company pension plans. Unlike an RRSP, however, there are no assets left for other family members after your death.
Currently, the major changes being proposed are an increase in the contribution rate from 4.95% to 5.95% to the current maximum of $54,900 then 4% to earnings of $82,700. These will be phased in gradually over 7 years starting January 2019. As an example, a worker with a $75,000 salary will see her CPP deductions go from $2,479.95 (2015 maximum) to $4,070.55 which is an increase of $1,590 or $132/month. Pretty substantial. Her annual CPP income at retirement will increase from $13,100 to $19,900.