Changes to the Canada Pension Plan announced by the country’s finance ministers yesterday (June 20) will hurt “an already fragile business sector,” according to the Canadian Chamber of Commerce.
The changes amount to a form of payroll tax that will damage struggling businesses and the middle class, according to Perrin Beatty, the organization’s president and CEO.
“Since employers pay half of the contributions, this will reduce much needed cash flow in many businesses,” Beatty said. “Employers may have to halt job creation in order to pay this CPP increase of delay important investments.
“Although there is never a right time for a payroll tax, the fragile state or our economy makes this a particularly bad time.”
The changes aim to change the amount of income replacement the CPP provides from one quarter of pensionable earnings to one third. For example, a worker who makes $50,000 while working would have annual CPP benefits of $16,000 per year, up from $12,000 without the changes.
As well, the new plan will increase yearly maximum pensionable earnings to $82,700 by 2025, from $54,900 where it currently stands.
Currently, both employers and employees contribute 4.95% of a worker’s salary between $3,500 and $54,900, with a yearly maximum of $2,356.20. Self-employed individuals pay 9.9%. The changes will lead to an increase relating to the new higher ceiling.
The Chamber pointed out that this will necessitate an increase in the CPP rate – but the government hasn’t said by how much.
“When a government promises big increases in benefits without telling us how much it will cost or who will pay for it, we know there’s a big bill coming,” Beatty said.
The plan will be phased in, with the first changes taking place January 2019.
The ministers also announced there will be an adjustment to the federal Working Income Tax Benefit, which they said will offset the impact of increased CPP contributions for low-income Canadians. As well, there will be a tax deduction, rather than a tax credit, for employee contributions related to the changed portion of CPP, which is intended to avoid increasing the after-tax cost of saving.
TD Economics’ Brian DePratto pointed out this is the first major change to Canada’s pension plan since it was first introduced in 1965. He said while there are many specifics relating to the changes that are not yet available, he said the changes will be a “significant, guaranteed enhancement” to the retirement incomes of most working Canadians.
“A number of studies have identified a savings gap among middle-income Canadians, which these changes should help reduce,” DePratto said in a note to investors. “However, the increase in contribution rates will impact Canadians across the income spectrum.
“For those earning below the income cap, increased contribution rates will result in higher deductions—and lower take-home pay—although changes to the Working Income Tax Benefit may help mitigate the impact.”
@EmmaHampelBIV
