By Sheryl Smolkin

Low earners stand to gain little from an expanded Canada Pension Plan (CPP), according to a new C.D. Howe Institute report. In “The Pressing Question: Does CPP Expansion Help Low Earners?”, authors Kevin Milligan and Tammy Schirle show the large differences in the net payoff from the expanded CPP for lower and higher earners.

Federal and provincial finance ministers agreed in June to expand the Canada Pension Plan. Under the status quo, CPP offers a 25% replacement rate on earnings up to a cap of $54,900. The expanded CPP will add a new layer that raises the replacement rate to 33.3% up to a new earnings cap of about $82,900 when the program is fully phased in by 2025.

To pay for this, both employer and employee contributions will be raised by one percentage point up to the existing earnings cap, and by four percentage points between the old and new earning caps. This expansion will be phased in during the period 2019 to 2025 for contributions, with benefits being phased in over the next 50 years commensurate to contributions paid.

This reform will substantially raise expected CPP benefits for most young workers now entering the workforce. For lower- and middle-earning workers, the higher replacement rate will lead to an eventual benefit increase of about 33% over existing CPP benefits.

For a high-earning worker, the maximum CPP benefits will increase more than 50% over the status quo. These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades.

However, the C.D. Howe study authors note two important shortcomings of the new package hamper its effectiveness, both related to low earners.

First, low earners are already well covered by the existing suite of public pension benefits – many now receive more income when retired than when working. Why expand coverage where it is not needed? As a contributory pension, the CPP risks worsening the balance of income between working and retirement years for low earners.

Second, the income-tested withdrawal of some government-program benefits wipes out much of the impact of extra CPP benefits for many low-earners. Around one-third of Canadian seniors currently receive the income-tested Guaranteed Income Supplement (GIS), so concerns about interactions with income-tested benefits have a broad base.

In order to be eligible for the GIS in 2016, a single, widowed or divorced pensioner receiving a full OAS pension cannot have over $17,376 individual income. Where a couple each receives a full OAS pension they will not be eligible for the GIS if their combined income exceeds $22,944.

To summarize these issues: expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.

The CPP agreement-in-principle reached by the finance ministers may address some of these concerns by offering an improvement to the Working Income Tax Benefit alongside the CPP expansion. It is possible that an expanded WITB could effectively counteract increased CPP contributions by some low earners, but no details of the WITB expansion have been provided to date. Nevertheless, low earners would still face the problem of CPP-GIS interactions that undercut the impact of expanded CPP benefits.

In a Globe and Mail article, authors Janet McFarland and Ian McGugan also note that expanded CPP does not do much to help people who do not collect CPP in the first place. That describes many senior women who spent most of their lives as homemakers and so earned little or nothing in CPP benefits. About 28% of single senior women over 65 live in poverty, according to a study this spring for the Broadbent Institute by statistician Richard Shillington of Tristat Resources.

In addition they say the planned CPP changes will also do only a limited amount to help affluent savers because the maximum amount of income covered by the plan will increase to only about $82,800 by 2025. Therefore, those with six-figure incomes will still have to save on their own if they want a retirement income that will replace a considerable portion of their incomes above the expanded limit.