Fixing CPP without Tanking the Economy

By Hendrik Brakel

Ontario has dodged a bullet, but is it time to celebrate?

On June 20, the federal government and eight provinces reached agreement to expand the Canada Pension Plan. Here at the Canadian Chamber of Commerce, we’re worried about the economic impact of a big increase in payroll taxes. But we’re also a little bit relieved.

Firstly, the good news: Businesses in Ontario have now been saved from the Ontario Retirement Pension Plan (ORPP) which was set to commence enrollment in 2017, and which would have been disastrous for the province.

How bad? The Canada Pension Plan (CPP) already costs 9.9% of salary (shared equally by employee and employer). ORPP would have added 3.8% (shared equally) on top of that, bringing us up to almost 14%. This is in addition to 4.5% for Employment Insurance as well as federal and provincial income taxes. All this would raise Ontario’s payroll tax burden up to the highest in Canada and up near the highest in the world (not quite France, but close), if we benchmark with the OECD’s report on taxing wages.

Even worse, the Conference Board estimated that ORPP would decrease household spending by $2.84 billion per year in the early years. We had argued forcefully that this was coming at the worst possible time in an economy reeling from weak commodity prices and slower consumer spending. It’s difficult to stimulate the economy while pulling money out of the pockets of employers and working Canadians.

The agreement to expand CPP means that ORPP is officially dead. Good riddance. The new agreement is preferable because the rate increase is roughly half the ORPP, adding 2% to the CPP cost (shared equally) and it is phased-in over five years beginning in 2019. It will also avoid a patchwork of provincial programs cropping up all across Canada.

The trouble is that the CPP expansion is a costly solution in search of a problem.

We’ve all heard the argument that Canadians don’t save enough and we must act now. Actually, a study from McKinsey shows that 83% of Canadians will retire without significant adjustment in their standard of living. A report from CD Howe points out that the average income of Canadian seniors, adjusted for tax and family size, is 91% of the average income of working age Canadians and that seniors are better off financially than younger Canadians. Fred Vettese, who co-authored a book on retirement with Bill Morneau, says there is no retirement crisis because we understate certain income sources, such as real estate, and overestimate our spending needs at advanced ages. And for many young people, the best thing they could do to improve their financial futures is to pay down high-interest debt right now, as opposed to having funds pulled out of their paycheques and sent to CPP.

We’ve also been asked why we’re so fussed about such a modest 2% increase in CPP. On the surface it seems like a tiny amount, but it will add up to almost $10 billion pulled out of consumers’ pockets annually when it’s fully implemented. Or consider the much-vaunted tax cut for the middle class: a Canadian who earns the average industrial wage of $54,900 saves $144. But her increased CPP contributions will be $408 per year.

The point is not that we should do nothing. Some workers are at risk: those who go from to job to job on contract find it more difficult to save. Seniors who depend on a spouse’s pension sometimes struggle when survivor benefits are clawed back. These folks should be helped with targeted programs, but the across-the-board CPP increase will simply hurt the economy.

Instead, we can help the middle class by improving savings opportunities and providing better incentives. Firstly, the government’s recently announced increase to the Guaranteed Income Supplement will help the most at risk seniors. Secondly, Canadians, by default, should be “opted-in” to savings plans in order to provide the nudge they need, and savings incentives could be targeted towards those in the lower middle income levels. The government could also allow Canadians to voluntarily contribute more to the CPP. Thirdly, we need to emphasize personal choice and responsibility. The CPP is supposed to help us save, not guarantee income for all Canadians. Finally, we need to improve the competitiveness of Canada’s economy. A flourishing business environment means better jobs and higher wages, which will give Canadians more money to save.

That is why we oppose increasing the tax burden on Canadian workers and businesses with a sweeping hike to CPP. There are measures that could help us save without hurting our economy.

Hendrik Brakel is the Senior Director of Economic, Financial and Tax Policy at the Canadian Chamber of Commerce. He works on policies that improve Canada’s economic performance and competitiveness as well as forecasting the global economic outlook.