Earlier this year, it looked as if federal-provincial negotiations on expanding the Canada Pension Plan, which had been stalled for the better part of a decade, were once again headed for failure. And then, suddenly, a deal. In late June, eight provinces and federal Finance Minister Bill Morneau reached an agreement in principle on CPP expansion; last Thursday, Manitoba signed on, raising the count to feds-plus-nine. Any reform of the national pension plan requires the approval of two-thirds of the provinces; with that hurdle cleared, a final agreement is expected by July 15.
The federal-provincial agreement is not perfect. But it represents progress – both in what it does, and what it prevents.
The CPP in its current form is an actuarially sound retirement insurance scheme, guaranteeing people a lifetime pension based on how long they worked and how much they paid in. It's one major flaw is its modesty: The average pension is just $643.11 a month. The maximum is just over $13,000 a year.
Right now, CPP is designed to replace one-quarter of the earnings of the average worker, with employees and employers paying premiums into the plan on income below $54,900. As a result of the federal-provincial deal, CPP will eventually replace one-third of average earnings. The maximum income covered will also rise, by 14 per cent, to just shy of $63,000 in today's dollars.
So yes, the modest CPP is being expanded – modestly. And the ramping up of benefits will take place over decades, so if you're in your 50s today, this reform will have almost no impact on your retirement income.
A better deal would have involved a CPP expansion that was more ambitious, but also more targeted at middle-income earners. The maximum income covered by CPP should have been raised higher, to $80,000 or more. And lower-income Canadians, those earning below $25,000 or so, shouldn't be paying more into CPP, because they are already well-covered by income support programs such as the Guaranteed Income Supplement.
The bottom line is that this plan for CPP expansion isn't perfect. But it's a real improvement on the status quo. And it avoids the balkanization threatened by Ontario's promise to introduce its own go-it-alone pension plan.
So break out the champagne. Not a magnum, but at least a (modest) piccolo.