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Simple CPP reform would help retirees most, study finds

A study concludes that some common proposals to boost the CPP would not have much impact on people earning less than $50,000 a year because there would be offsetting reductions from taxes paid on CPP benefits and from reductions in the amount of Guaranteed Income Supplement payments currently available for lower-income seniors.

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A simple reform to increase the cap on Canada Pension Plan contributions would lead to results that are almost identical to more complex reform proposals being touted by some provinces, a new academic study suggests.

A paper published Tuesday by University of British Columbia economics professor Kevin Milligan and Wilfrid Laurier University economics professor Tammy Schirle examines three popular proposals that have been tabled in recent years for reforming the Canada Pension Plan, and compares the outcome to a simpler reform designed by the professors to double the maximum salary cap on CPP payments.

It concludes that some common proposals to boost the CPP would not have much impact on people earning less than $50,000 a year because there would be offsetting reductions from taxes paid on CPP benefits and from reductions in the amount of Guaranteed Income Supplement payments currently available for lower-income seniors.

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Moreover, they conclude a simpler reform to raise the cap on the maximum income covered by the CPP from $51,000 currently to $102,000 would lead to a similar after-tax outcome for many workers without requiring the complex changes of some other proposals – including a reform tabled last year by Prince Edward Island Finance Minister Wes Sheridan that would create different contribution rates at different wage levels.

"These results suggest that the extra complexity of having three separate earnings ranges with three different replacement rates in the P.E.I. proposal results in surprisingly little effective boost for replacement rates compared to the much simpler ... plan," the report concludes.

"This raises the question of whether the additional complexity is worth it."

The report is aimed at federal and provincial policy makers who have been pondering various proposals to reform the Canada Pension Plan, including suggestions to double CPP payments across the board, as well as two more modest reform proposals for less dramatic increases.

Ontario Premier Kathleen Wynne has joined P.E.I. in supporting pension reform, and has has vowed the province will press ahead with a program to provide additional pension coverage on its own if the federal government or other provinces will not support CPP reform.

The new study concludes middle-income and upper-income workers are currently facing the greatest risk of a major drop in their standard of living in retirement because public pension programs such as CPP and Old Age Security are not designed to replace as much of their pre-retirement income. Lower-income earners currently fare better compared to their pre-retirement incomes in part because they are eligible to receive additional GIS payments, which are designed to ensure retirees do not live in poverty.

However, GIS payments are reduced as income rises – including when income from CPP payments increase. As a result, many reforms to boost CPP for lower-income earners are offset by lower GIS payments, the report concludes. The report says CPP reforms aimed at low-to-middle income earners need to be carefully considered in the broader context of other pension programs or they may not have the intended income benefit.

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"When combined with income taxes, the result is that less than half of the expanded CPP benefits are realized into consumable income for many Canadians," the report says.

The report concludes it is difficult to use CPP as a tool to increase retirement income for lower-wage earners, but says CPP reform is more effective for those earning more than $50,000 a year.

The report was published by the School of Public Policy at the University of Calgary.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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