How the three main Canadian Pension Plan enrichment proposals would work

OTTAWA — Public pension reform has been a key issue at federal-provincial finance ministers’ meetings at least since 2010, with officials having looked at three major proposals for Canada Pension Plan enrichment. The plans differ slightly in their approach, but their basic aim is to increase benefits for future generations of seniors.[np_storybar title=”Jim Flaherty favours targeted approach to CPP reform, no need for ‘bazooka’” link=”https://business.financialpost.com/2013/12/16/jim-flaherty-favours-targeted-approach-to-cpp-reform-no-need-for-bazooka/”%5D“There’s a specific group in our population, something like 23%, who are not saving adequately.That’s what we have to target, not the whole population,” he said. “So, we have to target those folks who are not saving enough for retirement.” Keep reading.[/np_storybar]They are also similar in that all three proposals are pre-funded, meaning that although contributions to pay for higher benefits all kick in at the same time, contributions will hit their maximum boosted level far quicker than benefits.1. The Wes Sheridan plan, proposed by the Prince Edward Island finance minister, may be the most complicated because it impacts workers differently depending on their level of earnings.Currently, the CPP plan pays out about 25% replacement benefits on up to $51,100 of pensionable earnings, resulting in a maximum annual benefit of $12,150. Because it is aimed at the middle class, the Sheridan plan calls for no changes in either benefits or contribution rates for employees on the first $25,500 or so of pensionable earnings.For those in the $25,500 to $51,000 earnings range, contribution rates for both employers and employees would rise by 1.5 percentage points each.The Sheridan plan also calls for doubling the pensionable limit to about $102,000, with the contribution rate on the additional $51,000 set a 1.55% each for employer and employees.The bottom line is that at the top end, those with pensionable earnings of $102,000, annual benefits would rise from the current $12,150 to about $23,400.In order to be pre-funded, premiums would be phased in over three years once the program started and benefits would be phased in over about 40 years before peaking.———2. The Canadian Labour Congress plan has also received much attention. The major difference is that it would not double the pensionable earnings limit, or create a separate category for lower income workers, hence it is far simpler.It calls for a three-percentage-point hike in premium rates for employers and employees equally from the current 4.95%. The maximum contribution rises from the current $2,356 to about $3,593 over 10 years.Annual benefits would double to 50% of pensionable earnings to about $24,000 at the top end, but the phase in period is long, close to 40 years.———3. A third proposal ministers have looked at in the past is called the 10-10-10 plan, so named because it would lift income replacement by 10 percentage points to 35% of pensionable earnings, while also raising the ceiling on those earnings by 10 points to $61,000. The other 10 refers to how many years it will take to fully phase in.———Analysts note that all the plans can be tweaked to reduce pain of premium hikes, but that would also lead to more modest boosts to benefits.

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