Canadian Interest

Liberal Proposals on the Canada Pension Plan

April 6, 2011

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If elected, the Liberals promise to work on a new, voluntary supplement to the Canada Pension Plan that they call the Secure Retirement Option (SRO). Here’s how it would work: Canadians can voluntarily contribute an additional 5 to 10 percent of their paycheck into a retirement fund backed by the CPP. A contribution to the SRO will result in an equal reduction in the RRSP contribution room. It is not entirely clear but the wording in the document seems to suggest that the SRO will be a definited contribution plan and hence not a true pension. Since any changes to the CPP will require the assent of the provinces, the Liberals only promise to “pursue this innovative approach”.

The Secure Retirement Option is a new public option, within the CPP, that would change the outlook for those Canadians who currently do not have a pension plan. It would allow them to avoid the risk, complexity and hidden management fees of RRSPs. A two-person household, with earnings that start at $35,000 per year, and rise to $65,000 per year over time would need to have annual pension of $14,000 on top of the existing Canada Pension Plan and Old Age Security to secure a pension worth 60 percent of their household income at retirement. A voluntary six percent contribution rate from gross pay over the working years to an SRO account would put the household on track to achieve that goal. Participating workers who contribute more, or those whose employers provide additional contributions, would receive an even more generous pension.

The SRO is the same supplementary CPP option that received much media attention in the run up to the pension reform roundtable last year. But it doesn’t appear all that different in substance from the Pooled Registered Pension Plans that the Government announced it is working on last December.

The Platform also says that the party will support “a gradual increase of the defined benefits under the core CPP” but details are conspicuous by their absence. How much of an increase are the Liberals talking about? By how much will CPP contributions by both employers and employees increase? Of course, we can’t expect too much from an election platform. Mentioning benefits while omitting any discussion of costs is par for the course for a political document.

Canadian Learning Passport: Check the fine print

April 5, 2011

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In their election platform unveiled over the weekend, the Liberal Party of Canada is proposing that if elected they will implement a new program called the Canadian Learning Passport. Under the program, the Liberals will pay $1,000 annually over 4 years for every high school student who attends college, university or CEGEP. Kids from low-income families will receive $1,500 per year. The Learning Passport benefit will be directly deposited into a child’s RESP and the amount will be reduced for part-time students.

The Liberal Platform also mentions in passing that the Learning Passport “will simplify the existing scheme of tax credits by ending and rolling in the modest Textbook and Education tax credits” [Emphasis mine]. For the 2010 tax year, the education amount is worth $400 and the textbook amount worth $65 for every month that a full-time student attends University. For a full-time student attending University throughout the year, these tax credits could be worth as much as $837 per year, which is anything but “modest”. Talk about giving with one hand and taking away with the other!

As reader Phil pointed out the other day, it would be far simpler to directly reducing tuition for all students. But then I suppose the Liberals are banking on the fact that people like receiving $1,000 (or rather a net benefit of $1,000 less the value of existing tax credits) directly more than some abstract promise of tuition fee reductions. And they are also likely hoping that Canadians aren’t paying close attention to the fine print.

Family Tax Cut: A Tax Cut for the Rich

March 30, 2011

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The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

[Tax Savings in Dollars with the Family Tax Cut at various income levels]

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

[Tax Savings in Percentage with the Family Tax Cut]