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August 27, 2014
New Ontario pension plan one step closer to reality

The re-election of the Ontario government and the rapid passage of its provincial budget in July have re-affirmed the province’s commitment to introduce its own universal defined benefit pension plan.

According to the budget document, the new Ontario Retirement Pension Plan (ORPP) will be similar to the Canada Pension Plan (CPP).  It will provide a defined income payment at retirement based on a plan member’s contributions, years of service and final average income.

The province plans to introduce the new pension plan in stages beginning in 2017.
The ORPP would be the first of its kind in Canada and will expand pension coverage to more than three million working Ontarians who currently rely on the CPP, OAS and their own savings for retirement income.

If adopted, the ORPP would include the following features:

  • The pension will replace 15 per cent of an employee’s income to a maximum annual earnings threshold of $90,000.
  • Employees will contribute 1.9 per cent of their earnings to the pension to a maximum salary level of $90,000.
  • Employers will contribute a matching 1.9 per cent of earnings.
  • Self-employed persons will contribute 3.8 per cent of their earnings, but participation will likely not be mandatory.
  • Contribution rates will be phased-in over two years.
  • The ORPP maximum earnings threshold of $90,000 will increase each year consistent with increases to the CPP’s maximum earnings threshold.
  • Employees with comparable workplace pension plans will not be required to join the plan.  It is not clear whether group registered retirement savings plans would qualify as workplace pensions.
  • Employees in federally regulated industries may be exempt from the ORPP.
  • An independent board will oversee investment of ORPP contributions, which are expected to be approximately $3.5 billion annually.

Under the province’s budget illustrations, the ORPP would generate the following incomes at age 65 after 40 years of employment:

  • A worker earning $45,000 per year would collect $6,410 annually ($534 per month).  With a CPP benefit of $10,680, his/her total retirement income, excluding Old Age Security (OAS), would amount to $17,090 or 40 per cent of his/her pre-retirement income.
  • A worker earning $70,000 per year would collect $9,970 annually ($831 per month).  The CPP benefit would add an additional $12,460, for a total income of $22,430, excluding the OAS, or 34 per cent of pre-retirement income.
  • A worker earning $90,000 per year would collect $12,815 annually ($1,068 per month).  With the CPP of $12,460, he/she would earn a pension income of $25,275, excluding OAS, or 30 per cent of pre-retirement income.

While the plan will help address the fact that not enough people have saved for retirement, it is expected to be strongly opposed by business and tax-payer groups.  

For businesses, the new pension will amount to an additional — and significant — payroll tax that may squeeze profit margins and reduce reinvestment.

For individuals living in Ontario, the ORPP will mean another payroll deduction.  Already 4.9 per cent of each individual’s yearly maximum pensionable earnings are channelled to the CPP.   The addition of the ORPP will mean that 6.8 per cent of each working person’s earnings will be directed to the two government pension plans.  The new tax will likely impact individual spending and savings patterns, at least in the short-term.

The impact of new pension may not be confined to Ontario.  Manitoba, Prince Edward Island, British Columbia and Alberta have expressed some interest in joining the scheme.

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