Ottawa unveils enhanced CPP benefits that will hike payouts to third of income

Financialpost.com
Sept. 19, 2016
By Gordon Isfeld

Finance Minister Bill Morneau unveiled the Liberal government’s long-anticipated overhaul of Canada Pension Plan benefits on Monday, but Canadians may have to wait nearly a decade more to see the changes translate into economic growth.

While the rollout will begin 2019, the expected benefits to the economy will likely not be felt until after the staged CPP adjustments have been fully implemented in 2025.

In fact, gross domestic product - along with employment growth - will take a marginal hit in the medium term from the pension changes, according to the Finance Department.

“What we’re focused on is how we can ensure Canadians that in the long-term future, their retirement is more secure,” Morneau told members of the House of Commons finance committee on Parliament Hill, which followed the release of the new CPP policy guidelines.

“We know that 1.1 million Canadian families are going to retire with a lower standard of living than they had when they were working. And we’re focused on how we can, in a responsible way, improve the Canada Pension Plan through enhancement to ensure they have a better situation in the future.”

The revamp of the federal pension program - a relic of the 1960s and long a sticking point between Ottawa and the provinces - will see the maximum benefits from the program, based on an individual’s share of annual earnings, grow from one quarter to one-third.

That means someone making an average of $50,000 a year over their working life would receive $16,000 a year in retirement benefits, up from $12,000.

“It will also increase the point at which this new one-third replacement rate maxes out by 14 per cent, which is projected to be equal to $82,700 in 2025,” the Finance Department said.

Monday’s announcement comes after Morneau reached an tentative agreement with the provinces in June to make “meaningful changes” to the federal program. Quebec will continue to operate its own pension scheme.

The minister said “a stronger CPP is a core promise we made to middle-class Canadian, and it’s one I’m proud to have worked with my provincial colleagues to deliver.”

The CPP enhancements are estimated to lift Canada’s economy by between 0.05 and 0.09 per cent over the period of the new program. At the same time, the new CPP level could potentially create between 6,000 and 11,000 jobs as impact more money flows into the economy.

However, the Finance Department acknowledge “there will a temporary impact that will result in employment being 0.04 to 0.07 per cent lower relative to its projected level in the absence of the CPP enhancement.”

“Compared to the status quo growth track of GDP, at its maximum impact the level of output is projected to be only between 0.03 per cent and 0.05 per cent.”

The Finance Department pointed to the federal government’s Budget 2016, as a comparison, which projected GDP growth of 0.5 per cent in 2016-17 and one per cent in 2017-18.

Meanwhile, the Canadian Chamber of Commerce, at its annual genereal meeting in Regina, called on the federal government to create a “balanced approach to private sector options within the Canada Pension Plan environment.”

“This would include offering additional employee contribution options, without requiring any additional financial input from the employer. Instead, the employer could, on a voluntary basis, match contributions,” said Perrin Beatty, the chamber’s president and CEO.

“We will be taking this, and the other resolutions adopted, to the government in the context of a meaningful discussion on business competitiveness.”