Most of us learn very early on in life that if something sounds too good to be true, well then, it probably is. This is exactly what came to mind when I started hearing talk late last year that the federal government was once again considering boosting CPP and QPP benefits. Of course it sounds like a fine idea at first blush. Many of us worry that we're not putting enough away for retirement, so why not have the government force us to tuck away a few extra dollars?
And that's where it becomes too good to be true. There's no free lunch in this world, and indeed, there's no free retirement. If retirement benefits are going up, then someone has to pay for it. The question we need to ask about any kind of a CPP/QPP increase is, what are the real costs, who pays, who can expect to reap the benefits, and what exactly can they expect to get?
Proponents of a CPP/QPP increase, a group made up largely of public sector unions and their supporters, have been talking up the advantages of a CPP expansion, but have been quite quiet about the costs. Canadians hearing of the Canadian Labour Congress (CLC) proposal to double CPP benefits may think that it is a great idea -- particularly those nearing their retirement date. However, you have to look at the fine print of their plan to find their admission that it would take 40 years to phase in the benefit enhancement entirely.
In fact, current retirees and working Canadians between the ages of 55 and 65, the two groups one would expect to be most interested in CPP/QPP changes, would get the least out of the deal on the benefit side. Anyone within ten years of retirement would see a very modest benefit increase, but would get to experience the pleasure of a 60 per cent increase in their CPP taxes (again according to the CLC).
In fact, you would have to be under 15 years old right now to ever see the full benefits of an increase.
As underwhelming as the potential benefits may seem, particularly for those who are within striking distance of retirement, the costs of a potential CPP/QPP increase are the real issue. CFIB issued a report entitled Forced Savings, which uses a University of Toronto macro-econometric model in order to project the economic impacts of various proposals to hike the CPP.
We've evaluated the CLC's proposal, but more recently, tested the impact of the so-called 10-10-10 CPP/QPP increase idea. This one is particularly troubling in that it isn't coming just from a union, but was recently under consideration by our federal and provincial finance ministers. The 10-10-10 idea would see an increase in maximum pensionable earnings from about $51,000 to $61,000, a hike in the pension benefit from 25 per cent to 35 per cent, and phasing this in over 10 years.
With the economy still in a fragile state and many Canadians struggling to make ends meet, a CPP/QPP increase would mean that everyone who pays CPP or QPP premiums would pay more. How much more would depend on your income, but it could be as much as $1,100 a year. If you are self-employed, you would pay a double share. On top of this, all employers would be on the hook for up to an extra $1,100 per year, per employee.
From an economic perspective, the increased costs for employers would have the biggest impact. Sharp increases in payroll costs with no equivalent increase in productivity would lead to a sharp reduction in job creation, with employment growth coming to a virtual standstill within 7 years of a CPP/QPP increase. The lost jobs would be recovered in the longer term, but only after a 1.5% reduction in average wages.
To make a long story short, for most of us, a CPP increase would mean certain pain, in exchange for uncertain gains. Working Canadians would see their CPP premiums increase each of the next ten years. On top of a lighter paycheque every January 1, it would mean fewer dollars to contribute to their RRSPs or TFSAs. Their reward at the end of it all? That is hard to say. Fifteen years ago, the CPP was in a financial mess and we had to increase premiums just to address years of mismanagement. Canadians have to ask themselves if they want put all their eggs in this particular basket.
CFIB has recently launched a campaign, entitled All signs point to trouble, to educate Canadians on the real costs of a CPP/QPP increase, and to give them an opportunity to tell decision-makers that this is a bad idea. You can get more information and sign our online petition at www.cfib.ca/cpp-qpp.
In the best case scenario, a CPP and QPP hike would give Canadians less choice of how to spend or save their money. In the worst case, and the worst would come to pass for some, it would cost jobs at a time when all of our governments are supposed to be focused on creating them. So, is this idea too good to be true? Our analysis suggests it most definitely is. Here's hoping Canadians will let their politicians know before it's too late.
Dan Kelly is President of the Canadian Federation of Independent Business (CFIB). In this capacity, Dan is the lead spokesperson and advocate for the views of the Federation's 109,000 small and medium-sized member businesses across Canada. Follow Dan on Twitter @CFIB and learn more about CFIB at www.cfib.ca.