Canada Projects Minimal Short-Term Cost From Pension Expansion

  • Trudeau seeks to address chronic under-saving for retirement
  • ’Real impact’ will be felt long term, finance minister says

Prime Minister Justin Trudeau’s expansion of the Canada Pension Plan will have a negligible cost in the short term before providing a modest long-term increases, government forecasts show.

The finance department projects a modest GDP decline of between 0.03 percent and 0.05 percent by 2025, or about C$1.3 billion ($1 billion), with the economy recovering to a break-even point by 2031. The jobs reduction will also be the strongest in 2025, with a loss of 0.04 to 0.07 percent, recovering to positive territory by 2036.

Trudeau is expanding contributions to, and benefits from, the country’s mandatory pension plan after reaching a deal earlier this year with provinces. The changes, aimed at chronic under-saving for retirement, will be introduced from 2019 to 2025. The economic impact of expanding CPP is expected to become net-positive -- that is, when long-term gains fully account for short-term contraction -- between 2045 and 2050.

“Do we need a stronger CPP? The answer is unequivocally yes,” Finance Minister Bill Morneau said in remarks prepared for a Monday appearance at a parliamentary committee in Ottawa. The changes “will lead to greater confidence, more jobs and create the conditions for overall economic growth in Canada.”

Trudeau campaigned on pension-plan expansion. Younger workers are increasingly pinched by declining private sector pension plan availability and rising home prices. All told, 24 percent of Canadian families are not on track to replace 60 percent of pre-retirement income, government figures suggest.

Payrolls, Provinces

Opponents have warned the measures will add new payroll costs on employers at a time of sluggish Canadian growth. Trudeau’s government announced changes aimed at mitigating the short-term impact of changes, including support for low-income workers and providing a tax deduction for new contributions, in June. “The real impact of a stronger CPP will be felt long-term,” Morneau said Monday.

Trudeau’s pension changes will increase contributions and the maximum payout. The current payroll contribution rate of 9.9 percent, split evenly between employers and employees, will rise to 11.9 percent by 2023. Over the next two years, a new tier with an 8 percent rate will be introduced on higher earnings. By 2025, that new rate will apply on income above the maximum pensionable earnings limit of C$72,500 but below an upper limit of C$82,700.

The mandatory national plan had been designed to replace one-quarter of retirement income. Under Trudeau’s changes, it will be designed to replace one-third of income. The changes will cost employees up to C$29 biweekly, after tax.

Trudeau will need to enact the changes through legislation, and hasn’t yet done so. That legislation will also trigger actuarial review of the proposal -- a financial analysis of its sustainability. Once legislation is passed through Parliament, at least seven of Canada’s 10 provinces representing at least two-thirds of the population will need to approve the deal. Eight of the 10 provinces representing 73 percent of the population tentatively approved the accord when it was announced in June.

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