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Why Young Workers Should Celebrate CPP Changes

Okay, all workers should care. But for the next gen, this pension upgrade was long overdue.

Paul Willcocks 23 Jun 2016TheTyee.ca

Paul Willcocks is a journalist and former publisher of newspapers.

Retirement might be 30 or 40 years away, but you should still be happy with the long-overdue agreement to improve Canada Pension Plan benefits.

The Canadian pension system is built on an out-of-date model. Retired people were supposed to be able to count on three income streams -- basic government benefits intended to keep people out of desperate poverty, Canada Pension Plan income based on pre-retirement income and workplace pension plans, and savings.

That third stream has been steadily drying up for most Canadians, especially those working in the private sector.

Twenty years ago, a majority of Canadian families were covered by a workplace pension plan.

Today, fewer than 40 per cent of Canadians have workplace pension plans. In the private sector, barely one in five people are covered by a plan. And benefits have been eroded as companies moved away from defined benefit plans, with guaranteed payments, to RRSP-type defined contribution plans. (Though politicians have protected and enriched their own defined benefit plans: Premier Christy Clark contributes $21,500 a year toward her MLA pension plan; taxpayers add another $86,000 a year to cover the real cost of future benefits.)

Governments have failed to respond effectively to shrinking workplace pension coverage. RRSPs were supposed to fill part of the gap, but fewer than 25 per cent of tax filers contribute, and the median amount in 2014 was a modest $3,000. (Tax filers include retired people, so the 25 per cent figure does understate contributions by people of working age.)

So, what's changed?

This week's reform is a small step to fix a broken system.

The CPP covers everyone with employment income and requires an annual contribution equal to 9.9 per cent of income. You pay half, and your employer pays half.

Contributions max out at an income of $53,600 this year. (The ceiling is adjusted annually.) At that level, you contribute $2,653 a year to the plan, matched by your employer.

When retirement rolls around, you get an indexed pension based on years of contribution and the amount you've contributed. The maximum pension this year is $1,093 a month, based on the principle that CPP benefits should equal about one-quarter of "pensionable earnings." Most people get less, because earnings were lower than the maximum or they contributed for less than the 39 years required to receive full benefits.

Add the basic Old Age Security Pension of $546 a month, and you're living on just under $20,000 a year, plus any workplace pension or income from savings.

The changes backed this week by most provinces -- including B.C. -- start with the decision that future CPP benefits should rise to equal one-third of pensionable earnings.

Based on that change alone, if the improved plan were in place today, the maximum benefit would be $1,490 a month, not $1,090 a month.

The maximum pensionable earnings limit will also increase to $82,700, providing possible future benefits of up to $1,723 for higher-income workers.

To pay for the improved benefits, the contribution rate will rise from 9.9 per cent of income to 11.9 per cent. So, instead of $2,653 a year, workers at the current maximum income level will contribute $3,189, matched by their employers.

The changes won't start to happen until 2019, and will be phased in over seven years. The pension increases will only affect people who contribute at the new levels, so retirees won't get an increase and young workers will see the greatest benefits. And some details are still to be decided.

Four reasons to love deductions

So why should you be happy about a bigger deduction from your paycheque?

First, because your employer is matching the contributions (which is why anti-tax and business lobby groups opposed the reforms).

Second, because despite all your good intentions, you probably won't be willing or able to save enough to fund your own retirement. RRSP contributions make sense -- though the greatest benefits flow to high-income Canadians. But good intentions fade when faced with soaring housing costs and other expenses.

Third, because the CPP provides professional management of the investment fund at a much lower cost than typical RRSP options like mutual funds. And unlike RRSPs, there isn't the risk that a sudden plunge in markets or bad decisions will slash retirement savings.

And fourth, and most importantly, the change signals that governments have recognized a responsibility to ensure citizens aren't living in poverty in their old age and to reduce -- at least a little -- inequality.

That is a big shift for some governments. The Harper Conservatives refused to improve the CPP, saying it would cost businesses too much money. And as recently as October, B.C. Finance Minister Mike de Jong suggested the economy wasn't strong enough to allow pension improvements.

The changes aren't revolutionary, and there's more to be done. But the pension improvements should be welcomed as a practical step to create a better future for Canadians.  [Tyee]

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