CANADA – Despite a tough global environment where Canadian businesses are struggling to be more competitive, Canada’s finance ministers are announcing plans to expand the Canada Pension Plan, which will have repercussions on an already fragile business sector.
We strongly support any program that will allow Canadians to save towards their retirement—as long as it is done on their own terms. The announced agreement to expand the CPP will basically be a form of payroll tax that, when it is in full force, will put further financial strain on Canada’s already struggling businesses and on the middle class.
Under the current CPP, employers and employees each contribute 4.95% of a salaried person’s earnings between $3,500 and $54,900, up to a yearly maximum of $2,356.20. Self-employed workers must pay both portions for a total of 9.9%.
The new agreement reached today would see the upper salary limit progressively increase to $82,700, and would aim at moving from a payout of 25% of earnings to a 33% payout. CPP rates will have to increase if the income replacement rises from one quarter to one third, but the government has so far not stated how much this will cost.
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. Since employers pay half of the contributions, this will reduce much needed cash flow in many businesses. Employers may have to halt job creation in order to pay this CPP increase or delay important investments. Although there’s never a right time for a payroll tax, the fragile state of our economy makes this a particularly bad time.
The silver lining of the agreement is that it likely means Ontario will not be moving ahead with its separate plan, the Ontario Retirement Pension Plan, which would have been an even worse strain on businesses of that province.
The worst thing Canada can do now is end up with a patchwork of retirement plans. Such a system would severely impact worker mobility and regional competitiveness across the country. We’re also glad to see today’s agreement address the question of low-income earners with an increase to the Working Income Tax Benefit and by making the enhanced employee contribution tax deductible.
It’s too bad, though, that employers won’t benefit from the same advantage. We think there are better ways to encourage Canadians to save for retirement without bringing in a big increase to payroll taxes that will hurt the economy and reduce the competitiveness of Canadian business.
