CPP contributions have risen in recent years due to the Trudeau government’s enhancement of the program.MARK BLINCH/Reuters
There were few fiscally conservative elements in the federal government’s spring economic update, but there was one exception. The cuts to Canada Pension Plan contributions are a welcome move that trims payroll taxes and puts more money back into the hands of businesses and workers.
The federal government, with agreement from the provinces and territories, plans to reduce the base CPP contribution rate to 9.5 per cent from the current 9.9 per cent, based on employment earnings between $3,500 and the annual limit, starting in January. (Quebec reduced contribution rates for its pension plan last year.)
For someone earning $70,000 that means both the employee and their employer will save $133 a year. That might not sound like much, but across roughly 16 million contributors, total contributions will be reduced by more than $3-billion a year.
CPP payouts to workers in retirement will remain the same. The most recent actuarial report shows the plan can be financially sustained with a lower contribution rate.
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Even though the contribution cut is modest, it’s important, given that tax burdens are cited as one of the biggest concerns of business owners. In addition to paying corporate income tax and sales tax and remitting federal and provincial income tax on behalf of employees, businesses need to pay other payroll taxes, such as CPP contributions and Employment Insurance and workers’ compensation premiums. Some provinces also have additional health and education taxes based on staff compensation that employers must pay.
Most of those levies are not traditional taxes as they are set aside for worker benefits, but from the employers’ point of view, they are effectively taxes on payroll. They also add a hefty administrative burden. The Canadian Federation of Independent Business says that in 2023, Canadian employers paid an average of $5,067 in payroll taxes (not including income tax) for an employee paid $50,000.
CPP contributions have risen in recent years due to the Trudeau government’s enhancement of the program, which added new contribution streams on top of the core amounts. The resulting richer benefits upon retirement will help many workers, particularly those without pension plans, as it reduces the risks of running out of money and relying on unpredictable financial markets. But for businesses, rising payroll taxes reduce profitability and can serve as a disincentive to hire new staff, acting as a drag on growth.
The reduction in contributions also puts more money into the pockets of workers, which could lead to increased spending, boosting the economy. Payroll taxes can also serve as a disincentive for working, and research shows they tend to suppress wages.
The federal government deserves praise for reducing CPP contributions, although it was low-hanging fruit. CPP is funded through its own revenues, so assets and liabilities don’t appear on federal balance sheets and there’s no impact on mounting debt loads. It also helps that the CPP’s fund is flush with cash, with more than $780-billion in its coffers.
The government might be able to further reduce the contribution burden to employers and workers if the Canada Pension Plan Investment Board, which runs the plan, ditched its active investment strategy. It has embraced a complex hedge-fund like strategy in recent years, with its fund managers selecting stakes in a wide range of assets, such as real estate and infrastructure projects around the world.
The CPPIB boasted in its last annual report about achieving a rate of return of 9.3 per cent that year, but the fund underperformed its benchmark portfolio. Since 2007, the year the fund switched to active management, Globe columnist Andrew Coyne calculates it lost more than $70-billion in foregone income with the strategy.
A passive strategy, such as buying index-linked ETFs, would have performed better, in part because of the high cost of active management. The CPPIB had 150 employees in 2005, and now it has a global team of 2,125, with its top executive earning $6.4-million last year.
While it’s important that the CPPIB remains at arm’s length from government, the Crown corporation is accountable to Parliament, and to the federal finance minister. Reining in the fund’s excesses would bring down costs, and the savings could be passed on.
This week’s modest reduction in contributions is a good start, but it shouldn’t be the end of improvements to the CPP.