Manitoba has agreed to sign on for federal Canada Pension Plan reforms and that gives the required 2/3 approval by the provinces required for the federal plan to move forward. Manitoba wanted emphasis on three key issues, discussed below, but the real issue to follow is this: will this be enough to help middle class Canadians fund their retirements?
Manitoba raised some important issues regarding the mechanics of the CPP of the future – thorns in the side of current benefit recipients under today’s rules:
- That the clawback under the GIS (Guaranteed Income Supplement) should be eliminated when widowed survivors received the CPP survivors’ benefit
- That the CPP death benefit, which has been set at $2500 since 1997, be indexed to inflation
- That the government confirm that anticipated increases to CPP benefits as a result of increased premiums extend proportionately to CPP survivor and disability benefits.
Another issue raised by the Manitoba government concerns the ability for higher earners to maximize their contributions to the CPP over a four-year plan rather than a two-year plan. The current proposals call for higher-income employees to add additional contributions of 4% to a maximum of $192 in 2024 and $408 in 2025 (and indexed subsequently). A four-year phase-in would see an additional contribution of about $100 per year over four years. It will take about 40 years of contribution to take advantage of full enhanced CPP benefits, so working throughout the period at a good paying job is important.
Currently the CPP premiums amount to 9.9% of contributory earnings, when both employer and employee contributions are counted. Individual employees contribute up to a maximum of $2544.30 annually, or $212 a month and their employers contribute an equal amount. These numbers are based on maximum contributory earnings of $51,400 ($54,900 less a basic exemption of $3500). Those who are self-employed must contribute both portions: that’s a maximum of $5088.60 per year or $424.05 per month.
According to Finance Canada, workers earning $55,000 would pay $7 a month more by 2019 or $84 per year. This is a result of a contribution rate increase from 4.95% to 5.10%. By the year 2023 however, this same worker would pay $46 a month more or $550/year. This is $22,000 more over the same 40-year period, or approximately $122,000 in lifetime contributions if their income level remained at $55,000.
Under the new plan, the maximum contribution level will rise 14% to $82,700 by the year 2025. There will be a five-year phase-in of increased contribution rates for those below the Yearly Maximum Pensionable Earnings, followed by a two-year phase-in of the upper earnings limit. The premium for that upper level between $54,900 and $82,700 will be 4% rather than 5.95%. In addition, the Working Income Tax Benefit will be increased to help with the extra cost for very low income earners and the enhanced portion of the CPP contributions will qualify for a tax deduction rather than as a tax credit.
Manitoba makes several good points. Currently CPP benefits reduce the GIS available to survivors. Survivors who receive only OAS and the maximum CPP survivor benefits see their GIS reduced from $856.39 per month to $407.39 per month. Proposed changes could increase the maximum survivor pension to about $10,400 in today’s dollars which would reduce the GIS to about $290 per month. The GIS is eliminated completely when annual income reaches $17,376 in 2016.
Further, CPP survivor benefits do not roll over on the death of a taxpayer to their spouse or children. Rather, while a survivor’s benefit may be possible, depending on contributions the deceased made to the plan, the combined survivor and retirement benefits are capped, so the more retirement benefits the survivor has, the less survivor benefits they will receive. Those who die early and never collect CPP benefits can’t leave anything to their heirs from their long time investment in the CPP, short of the unindexed death benefit of $2500. Manitoba is right to raise the unfairness of these provisions under the current regime.
The new CPP plan will have the objective of replacing one-third of the taxpayer’s employment income to this ceiling, or approximately $27,300. Under the current CPP rules, the plan’s objective was to replace 25% of employment income to a maximum of approximately $51,000.
However, despite the fact that the maximum CPP benefit is $13,110, the average CPP benefits are approximately $7,700—about 60% of the target. There are many reasons for this, including the fact that very few people work to the maximum earnings level throughout their entire career.
This gives financial advisors a great opportunity to be of service in retirement income planning.
The CPP changes are the subject of this month’s Knowledge Bureau poll. Be sure to weigh in with your thoughts on the options available to Canadians as we contemplate retirement planning for today’s forty and fifty year olds: