Voluntary CPP contributions will favour high earners

cpp_image2When I heard the announcement that the Conservative government is considering allowing Canadians to make additional voluntary contributions to the Canada Pension Plan, my first reaction was that maybe that’s not a bad idea.

After all, the CPP Fund reported last week a return of 18.3% for its latest financial year, its best showing ever. I don’t know about you, but I’d be happy if CPP was managing and investing more of my retirement savings.

But the fact is that I already have retirement savings. I have a pension, my RRSPs and TFSAs are maxed out and our house is paid off. However, for Canadians who do not have a workforce pension and are living from paycheque to paycheque, another opportunity to save voluntarily is not going to make a difference.

In fact, if voluntary CPP contributions are locked in until retirement, even when middle or low earners finally bite the bullet and set up a payroll savings plan, chances are they will opt for an RRSP or TFSA so they can get at the money in an emergency. Because employers probably won’t have to match contributions, there is little incentive for employees to contribute more money to CPP.

And clearly, yesterday’s bare bones announcement leaves too many questions unanswered. For example:

  • Will voluntary CPP contributions buy taxpayers defined benefit pensions or simply lump sums payable at retirement?
  • How much more will taxpayers be able to contribute to CPP? Will contributions be tied to income?
  • Will employers be able to contribute or match employee contributions if they wish to do so?
  • Will additional CPP contributions reduce RRSP contributions levels or be in addition to maximum permissible annual RRSP contributions?
  • How will financial institutions react if they believe voluntary CPP top-ups will siphon away a significant portion of their lucrative pension and RRSP market?

 

I’m glad that pensions will now be part of the discussion in the upcoming Federal Election. But I believe that if we are going to help Canadians who do not have a workforce retirement savings plan save for their future, that the model for CPP reform at least initially should be the Ontario Retirement Pension Plan which will be phased in beginning January 1, 2017.

Once the seemingly Herculean task of national enhancement to CPP has been accomplished, then we can have an intelligent discussion about also allowing additional voluntary CPP contributions.

 

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