What increased CPP contributions could mean for you

OTTAWA – The debate over retirement and the role of the Canada Pension Plan is in full swing on Parliament Hill. Here’s a quick look at what the possibilities could mean for you:

Increased mandatory contributions

Past proposals have suggested raising the contribution limit on CPP and the maximum benefit. Under that plan, those who make more than the current maximum pensionable amount would end up paying more into the system, but would stand to receive a larger pension. However, lower income workers would see little change in their paycheque and the benefits that they would receive in retirement.

Another way would be to increase the premium rate paid by workers and employers to help fund an increase in the size of pension you receive when you finally quit working. Regardless of how much they make, workers would have to pay more under this scenario, but they would also see the size of their pensions increase.

A mandatory increase could also be a combination of both a higher contribution limit and benefit as well as an increase in the premium rate and final pay-out for workers. This would have the broadest impact on increasing the amount people receive in retirement and what they have to pay.

The downside to a mandatory increase is that both employers and workers will pay more in what would be forced savings. The Conservatives have called this a tax increase and ruled it out as an option. It might also mean that people put less into their RRSP to make up for the extra amounts they are paying into the CPP.

Voluntary contributions

Canadians could choose to invest their money with the CPP like they do with other investments. Contributions over and above the required amount would invested alongside the rest of the fund. In doing this, contributors would benefit from investing alongside the big pension fund and its ability to make investments that an individual might not otherwise be able to.

However, tracking what could be millions of individual accounts would add cost to the system, offsetting at least some of the economies of scale gained by investing with the big fund. Questions about how easily investors would be able to take money out of the fund would have to be answered. If money can be withdrawn easily, it will complicate the fund’s ability to make long-term investments. But if investors are locked in or face high fees or penalties to withdraw, investing would be less attractive.

Under a voluntary system, decisions would have to be made about what happens to the extra money saved at retirement. Options could include having it roll over into an investor’s RRIF or improving a person’s CPP benefit.

This scenario would also put the CPP in competition with the mutual fund industry. Money voluntarily invested with the CPP is money that wouldn’t be invested with private-sector money managers.

It also assumes people have the money to invest. Canadians do not lack for various ways to save for retirement with RRSP,TFSA and PRPP accounts available to them. It may not be a lack of choice of investment vehicle that is stopping them from saving more for retirement.