What you need to know about CPP reform

Canada’s finance ministers meet in Ottawa on Sunday and Monday with a full agenda of federal-provincial issues to consider, ranging from infrastructure to equalization and health transfers to the new Canada Child Benefit. But the largest dollar item on the agenda is reform to the Canada Pension Plan. Two years ago, talk of CPP reform ended abruptly when the Conservative federal government declared it had no interest. But, with new parties in power in Ottawa and several provincial capitals, there is new momentum behind CPP reform. To set the stage, let’s look at the why, what and the who of CPP reform.

Why does the CPP need reform?

Evidence suggests that most Canadians have sufficient retirement income to keep their working-age standard of living intact through the retirement years. However, there is a substantial minority that is struggling. Among middle-earners who do not have a workplace pension plan, about half don’t achieve sufficient levels of incomes to provide a comfortable retirement.

Savings solutions that rely on voluntary participation are unlikely to help much. With RRSPs, TFSAs, and numerous other savings opportunities already available, adding one more voluntary option won’t help those who find it hard to save. A mandatory pension expansion, therefore, can help all Canadians prepare for their own retirements—and decrease the need for other taxpayers to subsidize the pensions of non-savers through the existing support programs for low-income seniors.

What will CPP reform focus on?

There are three main elements to look for in an expansion of the CPP.

First is the income range covered. In 2016, earnings between $3,500 and $54,900 are covered by the CPP. Most options for reform envision moving the upper limit higher in order to cover more middle-earners. As a point of comparison, Social Security in the U.S. covers a range up to US$118,500.

The second point of debate is the replacement rate on covered income. The target under the current CPP is 25 per cent, meaning that the CPP aims to pay an amount equal to about 25 per cent of covered earnings. Some proposals try to increase this replacement rate higher than 25 per cent for everyone, while others offer different rates at different bands of income.

The third item for discussion is what to do with those covered by existing workplace pension plans. In past CPP expansions, existing workplace plans often shrunk themselves to accommodate the larger CPP so that people didn’t end up with double-coverage. However, an alternative approach is to exempt those with workplace plans from the expansion. Figuring out which approach to take—and how to define a comparable workplace plan—will be pivotal to the discussions.

Who needs to agree to the reform?

Under the Canada Pension Plan Act, amendments to the CPP require the agreement of the federal government along with seven provinces comprising two-thirds of the Canadian population. Given that double constraint, how are the prospects for amendments being passed?

To start, the Liberal government in Ottawa included CPP reform in its platform, so the federal government shouldn’t be a problem.

The provinces of British Columbia and Saskatchewan have spoken explicitly against reform in recent months, so they’re likely out. Quebec also expressed some concerns, taking the potential “against” count up to three. If every other province agreed to reform, we would reach the required seven provinces agreeing. However, B.C., Saskatchewan, and Quebec have populations that exceed one-third of the 10-province total, so those three provinces alone could block reform on the population side of the amendment formula.

If Quebec were brought on board, blocking an amendment would require two of the remaining seven provinces—and that is less likely. So, as of right now, Quebec seems to be the pivotal vote. Ironically, Quebec runs its own parallel Quebec Pension Plan so would not necessarily be bound by any CPP reform. In practice, though, the QPP and CPP have evolved very similarly.

Whatever comes of the CPP discussions, the legislation mandates a three-year wait before any reform goes into effect. Moreover, most reforms being contemplated will only affect retirement incomes decades from now when today’s contributors hit retirement ages. So, the exercise the finance ministers begin on Sunday is one of long-run economic policy. The ministers may not reach agreement in their first round of renewed CPP talks, but it is worth taking the time to get it right.

This article originally appeared on macleans.ca.