The new year should be an opportunity to start fresh, make good on personal goals and tackle ongoing challenges. But for small business owners, 2019 is also shaping up to be full of new costs and obstacles, from restrictive passive investment rules to federally imposed carbon taxes in four provinces.
But one of the biggest challenges employers will face starting in 2019 is a multi-year schedule of Canada Pension Plan (CPP) increases, which will raise their payroll costs and leave them even less room to maneuver and make adjustments. Employees too face up to seven straight years of smaller paycheques, starting January 1.
Once the rates and threshold limits are fully raised, employers will be paying up to $1,100 more per employee per year. Employees will face the same, and the business owner will pay up to $2,200 more on the income they draw from their own business.
With these hikes on the horizon, employers will have less capital to reinvest in their business in order to grow, innovate, replace equipment or reach new markets. Employees will also have less take-home pay to spend, which will hurt the Canadian economy and our competitiveness. In return, retirement, disability and survivor's benefits will begin to increase from one quarter to one third of an employee's average work earnings.
The federal government should be credited for its recent efforts to help small firms grow their investments through accelerated capital cost allowances and for the small reduction in Employment Insurance rates, but these measures on their own are not enough to make up for the new cost increase coming our way.
The reality is that the vast majority of people working today will not see their benefits increase by much.
So is the impending pain worth it? The government has presented the increases as a net benefit for all Canadians, but the reality is that the vast majority of people working today will not see their benefits increase by much as a result of the upcoming premium hikes. The full increase in benefits won't come into effect until about 40 years after the five-year round of premium hikes, which may help younger workers just starting out but not older workers about the retire. And current retirees will get nothing from the CPP expansion.
Policymakers also argue that small businesses will benefit from the hikes since retirees will have more income to spend in local businesses. But many owners currently in business will be retired themselves before the benefits kick in, meaning they'll see all the costs but few of the benefits.
What the present generation of workers is likely to get is a drop in employment and wages, as employers reduce salaries to accommodate the added pressure on their payroll budget, and think twice about adding on new staff. In fact, in CFIB's latest survey 70 per cent of business owners said that the pressure to freeze or cut salaries was increasing as a result of the CPP hikes.
In a separate report conducted in partnership with the University of Toronto's Policy and Economic Analysis program, we found that the increases could result in 64,000 lost jobs, a loss 4.5 times greater than the government's predictions. The impact on jobs will continue to be felt until the late 2020s, after which it will mostly manifest in constrained wage growth for employees and the resulting higher deficits for government. Employees could also see their disposable incomes go down by an average of $700 by 2025.
What's especially concerning is that most Canadians are misinformed about CPP, how it works and the effect it will have on them. For example, almost 40 per cent of Canadians think the government pays for part of CPP (it doesn't). Three quarters don't know that it will take 40 years for the full increase in benefits to take effect.
But an even more jarring statistic is the number of Canadians who oppose the CPP increases when they learn of the potential effects on their wages. A full 70 per cent oppose the hikes if it means that their wages may be frozen as a result, and that number rises to 83 per cent if the premium hikes result in cuts. Clearly the government has more work to do educating and consulting the public before pushing through the increases in 2019, but time is running out.
Governments should take this opportunity to review their CPP plans with fresh eyes.
What the push to expand CPP contributions comes down to is a paternalistic concern that employees are not responsible enough to plan for their retirements and that the responsibility should be offloaded to employers. This, despite the fact that two thirds of Canadians are actively saving for their retirement already.
If the government truly wants to help Canadians plan for their retirements, it would serve them better by increasing contribution limits on registered retirement savings plans and tax free savings accounts, which are preferred by both employees and employers because they offer more flexibility than CPP. Policymakers should focus their efforts on educating Canadians about the savings options available to them, including Pooled Registered Pension Plans (PRPPs) and the importance of starting their retirement planning early. The government could also just increase the employee premiums on CPP to mitigate some of the most concerning effects that the hikes will have on jobs and wages.
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A new year brings new ideas and possibilities. The federal and provincial governments should take this opportunity to review their CPP plans with fresh eyes and find better, more effective ways to help Canadians save for their retirement.
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