Mr. Speaker, on June 20, 2016, Canada’s ministers of finance reached an agreement in principle to enhance the Canada pension plan, CPP. The agreement will strengthen the CPP for future generations of Canadians, increasing income replacement from one-quarter of their eligible earnings to one-third, with an increase to the earnings limit. These changes will be phased in slowly over seven years, from 2019 to 2025, so that the economic impacts are small and gradual.
Once fully in place, the CPP enhancement will increase the maximum CPP retirement benefit by about 50%. The current maximum benefit is $13,110. In today’s dollar terms, the enhanced CPP represents an increase of nearly $7,000, to a maximum benefit of nearly $20,000. Over time, the enhancement is expected to materially increase the incomes of retirees, leading to increased consumption. In addition, the CPP provides a secure, predictable benefit that is fully indexed to inflation and payable for life, which means that Canadians will be able to worry less about outliving their savings in retirement.
The Department of Finance has conducted analyses to estimate the impacts of the CPP enhancement using economic modelling tools. The assumptions used in these models reflect those that are standard throughout the economic literature and best efforts have been made to neither understate the costs nor overstate the benefits of the proposed CPP enhancement. In general, the economic impacts of the CPP enhancement are expected to be net positive over the long term. The short-term impacts posed by increased contribution rates will be very modest and further mitigated by the phase-in of contributions
In response to part (i) regarding the number of jobs, over the long term, employment levels are projected to be permanently higher by between 0.03% and 0.06% relative to the baseline. In the short term, enhancing the CPP will lead to a temporary effect on employment growth. At its maximum impact, this will result in employment being between 0.04% and 0.07% lower relative to its baseline level in the absence of the CPP enhancement. By way of comparison, over the past five years, overall employment growth averaged roughly 1.1% per year. In this context, the impact on the overall labour market from the enhancement will be very limited. While the short-term impacts would be very modest, middle-class families and the whole of the economy would benefit long term.
In response to part (ii) regarding economic output, in the long term, real GDP is estimated to be between 0.05% and 0.09% higher than under the status quo as a result of the CPP enhancement. Compared to the status quo growth track of GDP, the level of output is projected to be a maximum of between 0.03% and 0.05% lower over the phase-in period. In this context, GDP would continue to grow in the short term, albeit at a slightly slower rate. By way of comparison, the measures contained in budget 2016 are projected to increase the level of GDP by 0.5% in 2016-17 and 1% in 2017-18.
In response to part (iii) regarding disposable income, over the long term, as CPP benefits increase and the positive impacts on output kick in, disposable income is projected to be higher by 0.2% to 0.4% relative to the status quo. In the short term, disposable income over the phase-in period is projected to be 0.03% to 0.06% lower than under status quo. Again, this short-term impact would be more than offset by the long-term economic benefits.
In response to part (iv) regarding private savings, the CPP enhancement would increase overall retirement savings. There will be a modest reduction in private savings as Canadians rebalance their savings decisions to account for enhanced CPP benefits. In the short term, private savings are expected to decline by between 0.5% and 1.3% per year. Over the long term, it is expected that the cumulative amount of private savings will be about 7% lower than under the status quo, reflecting the reduced need for Canadians to rely on their own savings to maintain their standard of living in retirement.
In response to part (v) regarding business investment, over the long term, the level of investment is projected to be 0.03% higher as higher aggregate savings through the CPP will increase the amount of financing available for investment. In the short term, business investment is projected to be 0.03% to 0.06% lower relative to the status quo over the phase-in period.