Low-income earners will receive little benefit from the planned expansion of the Canada Pension Plan despite paying higher premiums, unless governments provide more help to offset a corresponding reduction in other government payments, according to an analysis of the new model.
A new C.D. Howe Institute report by researchers Kevin Milligan and Tammy Schirle says many Canadian workers will see their higher CPP benefits virtually all offset by clawbacks to their Guaranteed Income Supplement (GIS) benefits, leaving little gain for lower-income workers in particular.
The impact is less for middle- to high-income workers who receive less support from GIS. The GIS program supplements universal Old Age Security benefits for low-income retirees, and is currently paid to about one-third of Canadian seniors.
For example, the report says a worker with average earnings of $20,000 a year will see his annual CPP benefit climb to $6,667 from $5,000 currently under a new CPP model announced in June by federal and provincial finance ministers. However, the same worker will see $1,251 of his Guaranteed Income Supplement (GIS) benefit clawed back because his income level has risen, leaving a net gain of just $416 a year.
The result is that the worker will see his total government benefits – including CPP, Old Age Security and GIS – equal 96.4 per cent of his preretirement income of $20,000 annually, a modest increase of just 2.1 percentage points from 94.3 per cent currently, the report says.
To pay for the expanded program, workers are expected to see their paycheque deductions rise by one percentage point to 5.95 per cent of salaries from 4.95 per cent currently, once the program is fully phased in by 2025. C.D. Howe research director Alex Laurin said the higher premiums are a significant burden for low-income earners who cannot easily afford even a few hundred dollars a year.
"That's a lot of money for people who don't have money to start with – it's asking for a pretty big sacrifice for almost no reward," he said.
When the expansion was announced in June, the federal government said it would offset the cost of CPP premium increases for low-income workers by expanding the Working Income Tax Benefit, which provides a benefit to supplement earnings for the lowest tier of income earners.
No details have been provided about how the WITB program will be expanded, but Mr. Laurin said it is not the best tool to help workers.
The WITB program reaches a maximum benefit at income above $12,000 a year, which is far below the income levels that will be affected by CPP increases, he said. It is also not structured to prevent GIS benefits from being clawed back as expanded CPP benefits grow.
Instead, the C.D. Howe report says it would be more effective to either start the CPP increase at earnings above $35,000 a year, or to exempt more of the increase in CPP benefits from the GIS clawback rules, letting retirees keep more of their CPP increase.
"We can see that it would pretty much work," Mr. Laurin said. "I don't know what the cost would be, but it would work to exempt part of those new benefits from [GIS] clawbacks."
Editor's note: A Wednesday story about a report on Canada Pension Plan reforms by the C.D. Howe Institute misspelled the name of one of the report's authors. His name is Kevin Milligan, not Mulligan.