• Money and finance

The Pension Question: Whither CPP Expansion?

Guest Blogger | July 7, 2016

Written By: Brett Hughes, Business Writer, CFIB

For a start-up business owner, meeting payroll may not be your immediate concern, given that your business is just getting off the ground.

A slate of full-time employees might come a few years down the road, once you’ve firmly established your business model and taken some steps towards scalability, and, ideally, profitability.

Yet payroll stands to become a significant line item on your accounting ledger. In fact, for many companies, payroll is the largest expense for the business.

It’s not a surprise that many small business owners are paying very close attention to the current debate over the plan to expand the Canada Pension Plan (CPP).

Nine of 10 provincial finance ministers, along with the federal government, have signed an  agreement in principle to expand CPP (Quebec has yet to sign the agreement, pending further review of its plan in the fall  ).  In order to expand CPP, the federal government needed the support of at least seven of 10 provinces, representing two-thirds of Canada’s population.

Beginning in 2019, workers and employers will see their CPP contributions go up. Although the details are still emerging, the reform will see pension benefits increase from 25% of income to about 33% of income. Employer and employee premiums would each rise from the current 4.95% of employees’ pensionable earnings to 5.95%.

The amount of income subject to CPP premiums will also go up: income up to $82,700 will be subject to CPP contributions (the current threshold is $54,900, expected to rise to $72,500 by 2025), although the contribution rate will be 4% on this new income bracket.

The new plan will be phased in from 2019-2025, with a July 15, 2016 deadline set to finalize the agreement in principle.

For large companies, a few extra hundred bucks here and there per employee won’t be a difference-maker. For small firms, however, a payroll tax of this nature could be the difference between profitability and purgatory.

At the very least, a mandatory hike in CPP payroll premiums stands to create uncertainty for many small businesses: some will have to cancel wage increases; some will avoid additional hiring; some will look at increasing the cost of their products and services; and others may close their doors entirely.

The Canadian Federation of Independent Business has taken the pulse of its members through surveys and the results continually show little support for CPP expansion. Over two-thirds of small businesses say they are opposed to a CPP hike.

Canadians in general don’t see additional mandatory CPP contributions as the best way to help them save for retirement: when asked, they choose RRSPs and TFSAs ahead of mandatory CPP payments.

There are a host of legitimate reasons to get behind policy that will help people afford a more comfortable retirement, yet CPP expansion is definitely not the policy that will achieve this goal.

In fact, if the goal is to assist the current cohort of seniors with their retirement savings, then CPP hikes are probably the worst way to accomplish this, since they will receive literally nothing through expanded premiums (it will take nearly 40 years for benefits to be paid out to contributors). It also bears mentioning that truly poor senior citizens won’t receive the ostensible benefit of increased CPP payments, since many of them didn’t make contributions to CPP in the first place (remember that CPP takes a percentage of a person’s working wages; people who did not regularly participate in the workforce won’t be seeing much in the way of CPP payments at 65).

There’s also the small matter of whether or not Canadians are even experiencing a “retirement savings crisis.” Depending on which source you follow, this is either overstated or a complete myth. Either way, CPP expansion in the current economic climate will prevent many small businesses from expanding, while giving prospective start-ups one less reason to launch.

If you want to explore some facts and figures associated with CPP and how it will affect you, please visit RetirementReality.ca for more information.

Did you know? As a new entrepreneur with Futurpreneur, you get a free 6-month membership with My StartUp, a program offered by CFIB that provides resources and support to new entrepreneurs? Register here. 

About The Author: 
Brett Hughes is a business writer for CFIB, a non-profit organization dedicated to serving Canada’s small business community. To learn about CFIB’s free membership program for first-time entrepreneurs, visit MyStartUp.ca. To read more My StartUp advice provided by Brett and other entrepreneurial-minded individuals, visit the My StartUp blog.