The federal government's plan with the provinces for an enhanced Canada Pension Plan will boost payouts, but the full effect of those increases will not be felt for 40 years, according to estimates supplied by the Finance Department on Monday.
A 16-year-old entering the workforce now will gain the most from the government's push to hike CPP contributions, while current retirees, and those on the cusp of retirement, will see no increase to their benefits.
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Indeed, a 50-year-old worker earning $50,000 a year is entitled to less than $500 more a year after retiring at age 65 under the new, more generous CPP.
"Each year of contributing to the enhanced CPP will allow workers to accrue partial additional benefits. Full enhanced CPP benefits will be available after about 40 years of making contributions. Partial benefits will be available sooner and will be based on years of contributions," the department said in a background document prepared for reporters.
Finance Minister Bill Morneau told the House of Commons finance committee on Monday that CPP will eventually replace one-third of a person's pre-retirement income, up from a quarter. The maximum payout will also rise from $13,110 a year to nearly $20,000 when fully implemented. (Benefits are indexed to inflation.)
Low-income seniors to benefit
NDP MP Scott Duvall said there is a widespread misperception among current retirees in his Hamilton riding that they will see more generous cheques under the new Liberal plan.
"I look at what is being proposed here, certainly it does not go far enough," he said at committee, noting seven in 10 Canadians do not have a workplace pension. "This is a great thing for our children, and our grandchildren, who are starting out work. But we need to know what is happening to the people who are nearing retirement now? Where's the benefit to them?"
Morneau acknowledged that most of the benefits will be directed at younger Canadians, but said this is inevitable in a plan that is legislatively mandated to be fully funded. It also ensures intergenerational equity, with each age cohort paying for their own benefits, he said. Benefits under CPP are paid out according to a formula based on lifetime contributions from workers and their employers.
"We do recognize that this is something about the future. We are trying to ensure that our retirement system stays one of the most respected systems on the globe by ensuring that it remains fully funded."
The finance minister said older workers will see a financial gain from the government's so-called middle-class tax cut and its Canadian child benefit. He said these programs will allow people to put aside more of their own money for retirement.
But Conservative MP Ron Liepert tried to throw cold water on that answer, saying his calculations show the middle-class tax cut will amount to no more than $365 a year in savings for most tax filers, whereas the boosted CPP contributions will set most earners back an extra $540 a year.
Morneau also said low-income seniors stand to benefit from the Liberal government's $947-a-year boost to the guaranteed income supplement, which was announced in budget 2016. Old Age Security payments will be remain available at age 65, with the former Harper government's proposal to increase the age of eligibility to 67 off the table, the finance minister reiterated.
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Morneau said the CPP increase is necessary because younger Canadians are facing a savings gap with fewer employers offering defined-benefit pension plans, which guarantee a certain monthly sum in retirement. Workers are increasingly reliant on defined-contribution retirement plans, he said, which are more risky because they're reliant on the whims of the market.
$43 more a month
In 2019, employees and employers will start paying more to cover the costs associated with the new benefits.
Morneau estimates workers earning $54,900 a year will pay an extra $43 more a month into the plan by 2025 when enhanced contribution rates are fully phased in.
The increase will temporarily reduce employment levels, but the effect is expected to be "very modest," he said.
"There will be a temporary impact that will result in employment being 0.04 to 0.07 per cent lower relative to its projected level in the absence of a CPP enhancement."
There will also be a small hit to the bottom line for businesses across the country, but because increases to contributions will be phased in over seven years, the department estimates firms will have more than enough time to adjust to the higher compensation costs. Morneau called the increases "entirely manageable."
But Conservative interim leader Rona Ambrose called the CPP hike an "unfortunate" development that will curtail a worker's take-home pay.
"When something comes off your paycheque, and you no longer have it, it's a tax hike, and this is exactly what this is. Mr. Morneau has been transparent about it, I'll give him credit for that. He's admitting this is going to cost Canadians a lot of money, jobs will be lost [and] at the end of the day it is not the best vehicle for savings."
Most of Canada's finance ministers reached an agreement in principle in June to revamp CPP, and Morneau said Monday the government will table legislation this sitting to implement the agreed changes.