So it's not exactly the Empire versus the Rebels, but the Trudeau government has effectively nixed the Ontario provincial mini-Empire's plans to implement the Ontario Retirement Pension Plan ("ORPP"). The Federal Liberal government has recently introduced Bill C-26 An Act to Amend the Canada Pension Plan, the Canada Pension Plan Investment Board Act and the Income Tax Act in an effort to expand Canada Pension Plan ("CPP") benefits. Given the planned expansion of CPP benefits, the Provincial Liberal government has announced its plans to repeal the Ontario Retirement Pension Plan Administration Corporation Act, 2015, and essentially defer to the CPP.
Expanded CPP Benefits
Workers and employers in Canada currently pay 4.95% of salaries into the CPP, up to a maximum income level of $54,900 annually. People with incomes over $54,900 do not make contributions for income greater than that amount. Canadians retiring at age 65 currently receive up to $13,110 through CPP payouts.
The first major expanded benefit under the new CPP plan is an increase in the annual payout target, from about 25% of pre-retirement earnings (up to $54,900 in income) to one-third of the same income level. This represents an estimated increase to about $17,500 annually.
The second major expanded benefit under the new CPP plan is an increase in the maximum amount of income to which CPP contributions apply. That income ceiling will increase from $54,900 to $82,700 once the program is fully phased in by the year 2025. It is estimated that annual CPP payout for a person making contributions up to the $82,700 level will be $19,900 in 2016 dollars.
Expanded CPP Costs
Of course, employers know that you can't expand benefits without expanding costs. In order to fund the expanded benefits under the CPP, that 4.95% of salary contribution for employers and employees will have to increase to 5.95% on a gradual basis between 2019 and 2023.
The portion of earnings between $54,900 and $82,700 is expected to have a contribution rate set at 4% for employers and employees.
What Do the Changes to CPP Mean for Employers?
A practical issue for employers is unavoidable: how do we deal with immediate costs to the employer but delayed benefits for the employees? Employers who have private pension plans in place will likely not want to, or not be able to, continue to fund the pension benefits at the same levels when government pensions are increasing. However, it is estimated that people in their teens today, will be the first to reap the full benefits of the new CPP rules when they retire in the distant future, because everyone who has been paying into CPP already, will only receive increased benefits insofar as they have been paying into the Plan under the new rules.
Employers will need to carefully consider whether to simply absorb the additional costs of the new CPP rules, or to amend and revise their pension contribution plans to save money in the long run. The latter option however will require caution to avoid risks of constructive dismissal claims under employment law, to ensure compliance with all pension laws, and to prepare for collective bargaining in the unionized context. The lawyers at CCPartners are well-equipped to assist employers consider their options and prepare for all of these contingencies.
CCPartners will continue to report on developments in this area, as we have been since suggestion of the ORPP first arose. For your reference you can review two previous blogs here and here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
